UNITED STATES
SECURITIES AND EXCHANGE
COMMISSION
Washington, D. C. 20549
FORM 10-K
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended December 31, 1997
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period
from ______________ to _________________
Commission file number 000-20557
THE ANDERSONS, INC.
(Exact name of registrant as specified in its charter)
OHIO 34-1562374
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
480 W. Dussel Drive, Maumee, Ohio 43537
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (419) 893-5050
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Shares
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the registrant's voting stock which may be
voted by persons other than affiliates of the registrant was $58,189,660 on
February 27, 1998, computed by reference to the last sales price for such stock
on that date as reported on the Nasdaq National Market
The registrant had 7,986,065 Common shares outstanding, no par value, at
February 28, 1998.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the 1997 Annual Report of The Andersons, Inc. and Proxy
Statement for the Annual Meeting of Shareholders to be held on May 14, 1998,
are incorporated by reference into Parts II (Items 5, 6, 7 and 8), III (Items
10, 11 and 12) and IV of this Annual Report on Form 10-K. The Proxy Statement
will be filed with the Commission on or about April 15, 1998.
PART I
Item 1. Business
(a) General Development of Business
The Andersons, Inc. is a diversified company operating in three segments.
The Agriculture Group engages in grain merchandising, operates grain elevator
facilities located in Ohio, Michigan, Indiana and Illinois, distributes
wholesale agricultural fertilizer and operates retail farm centers. The
Processing and Manufacturing Group includes the processing of lawn and corn-cob
based products; the purchase, sale, repair and leasing of railcars; and the
operation of automotive service centers. The Retail Group operates six retail
stores in Ohio.
Prior to January 2, 1996 the Company was structured as two entities;
The Andersons Management Corp. (the "Corporation") and The Andersons (the
"Partnership"). The Corporation was the sole general partner of the
Partnership and provided all management services to the Partnership. The
Partnership was the successor to other Ohio limited partnerships which
operated as "The Andersons" continuously since 1947. On January 2, 1996,
the Partnership merged with and into the Corporation. The Corporation
survived and changed its name to The Andersons, Inc. See Note 1 to the
consolidated financial statements for further discussion about the merger.
(b) Financial Information About Industry Segments
See Note 13 to the consolidated financial statements for information
regarding business segments.
(c) Narrative Description of Business
Agriculture Group
The Agriculture Group operates grain elevators, wholesale fertilizer
terminals, and retail farm centers.
The Company's grain operations involve merchandising grain and
operating terminal grain elevator facilities. This includes purchasing,
handling, processing and conditioning grain, storing grain purchased by the
Company as well as grain owned by others, and selling grain. The principal
grains sold by the Company are yellow corn, yellow soybeans and soft red and
white wheat. The Company's total grain storage capacity was approximately 69
million bushels at December 31, 1997.
Virtually all grain merchandised by the Company is grown in the
Midwestern portion of the United States (the Eastern Corn Belt) and is
acquired from country elevators, dealers and producers. The Company makes
grain purchases at prices referenced to Chicago Board of Trade quotations. The
Company competes for the purchase of grain with grain processors and feeders,
as well as with other grain merchandisers.
During 1997, approximately 71% of the grain sold by the Company was
purchased domestically by grain processors and feeders, and approximately
29% was exported. Most of the exported grain was purchased by exporters for
shipment to foreign markets. Some grain is shipped directly to foreign
countries, mainly Canada. Almost all grain shipments are by rail or boat.
Rail shipments are made primarily to grain processors and feeders, with some
rail shipments made to exporters on the Gulf or east coast. All boat shipments
are from the Port of Toledo elevator. Grain sales are effected on a negotiated
basis by the Company's merchandising staff.
The Company's grain business may be adversely affected by the grain supply
(both crop quality and quantity) in its principal growing area, government
regulations and policies, conditions in the shipping and rail industries and
commodity price levels. See "Government Regulation". The grain business is
seasonal coinciding with the harvest of the principal grains purchased and sold
by the Company.
Fixed price purchases and sales of cash grain and grain held in inventory
expose the Company to risks related to adverse changes in price. The Company
attempts to manage these risks by hedging fixed price purchase and sales
transactions and inventory through the use of futures and option contracts with
the Chicago Board of Trade ("CBOT"). The CBOT is a regulated commodity futures
exchange that maintains futures markets for the grains merchandised by the
Company. Futures prices are determined by worldwide supply and demand.
The Company's hedging program is designed to reduce the risk of changing
commodity prices. In that regard, hedging transactions also limit potential
gains from further changes in market prices. The grain division's
profitability is primarily derived from margins on grain sold, and revenues
generated from other merchandising activities with its customer, not from
hedging transactions. The Company has a policy which specifies the key
controls over its hedging program. This policy includes a description of the
hedging programs, mandatory review of positions by key management outside of
the trading function on a biweekly basis, daily position limits, modeling of
positions for changes in market conditions, and other internal controls.
Purchases of grain can be made the day the grain is delivered to a
terminal or via a forward contract made prior to actual delivery. Sales of
grain are generally made by contract for delivery in a future period. When the
Company purchases grain at a fixed price, the purchase is hedged with the sale
of a futures contract on the CBOT. Similarly, when the Company sells grain at
a fixed price, the sale is hedged with the purchase of a futures contract on
the CBOT. At the close of business each day, the open inventory ownership
positions as well as open futures and option positions, are marked-to-the-
market. Gains/losses in the value of the Company's owned inventory positions
due to changing market prices are netted with and generally offset by
losses/gains in the value of the Company's futures positions.
When a futures contract is entered, an initial margin deposit must be sent
to the CBOT. The amount of the margin deposit is set by the CBOT and varies by
commodity. If the market price of a futures contract moves in a direction
which is adverse to the Company's position, an additional margin deposit,
called a maintenance margin, is required by the CBOT. Subsequent price changes
could require additional maintenance margins or could result in the return of
maintenance margins by the CBOT. Significant increases in market prices, such
as occur when weather conditions are unfavorable for extended periods, can have
an effect on the Company's liquidity and require it to maintain appropriate
short-term lines of credit. The Company may utilize CBOT option contracts to
limit its exposure to potential required margin deposits in the event of a
rapidly rising market.
The Grain division relies on forward purchase contracts with producers,
dealers and country elevators to ensure an adequate supply of grain to its
facilities throughout the year. Bushels contracted for future delivery at
February 28, 1998 approximated 22 million, all of which was to be delivered in
the 1997 and 1998 crop years. The Company relies heavily on its hedging
program as the method for minimizing price risk in its grain inventories and
contracts. The Company monitors current market conditions and may expand or
reduce the purchasing program in response to changes in those conditions. In
addition, the Company reviews its purchase contracts and the parties to those
contracts on a regular basis for credit worthiness, defaults and non-delivery.
Provision is made under the Grain Trade Rules of the National Grain and Feed
Association ("NGFA") for resolution of contract defaults (non-delivery of
grain) and for arbitration of contract disputes. The Company's standard
purchase and sales contracts include arbitration clauses, and the Company is
currently arbitrating several cases before the NGFA.
The Company competes in the sale of grain with other grain merchants,
other elevator operators and farmer cooperatives which operate elevator
facilities. Competition is based primarily on price, service and reliability.
Some of the Company's competitors are also its customers and many of its
competitors have substantially greater financial resources than the Company.
The Company announced on March 25, 1998, a signed letter of intent to
lease the two grain handling facilities owned by Cargill, Inc. in Maumee and
Toledo, Ohio. This letter of intent also includes a marketing agreement giving
Cargill marketing rights to grain in the two Cargill-owned facilities as well
as the Andersons' facilities also located in Maumee and Toledo, Ohio. The
Company expects the agreement to be finalized by June 1, 1998.
The Company's wholesale fertilizer operations involve purchasing, storing,
formulating, and selling dry and liquid fertilizers; providing fertilizer
warehousing and services to manufacturers and customers; and wholesale
distribution of seeds and various farm supplies. The major fertilizer
ingredients sold by the Company are nitrogen, phosphate and potassium, all of
which are readily available from various sources.
The Company's wholesale fertilizer market area primarily includes Illinois,
Indiana, Michigan and Ohio and customers for the Company's fertilizer products
are principally retail dealers. Sales of agricultural fertilizer products are
heaviest in the spring and fall.
The Company's aggregate owned storage capacity for dry fertilizer was 11.5
million cubic feet at December 31, 1997. The Company reserves 5 million cubic
feet of this space for various fertilizer manufacturers and customers. The
Company's aggregate storage capacity for liquid fertilizer at December 31, 1997
was 27.5 million gallons and 8.5 million gallons of this space is reserved for
manufacturers and customers. The agreements for reserved space provide the
Company storage and handling fees and, generally, are for an initial term of
one year and are renewable at the end of each term. Included in this aggregate
storage capacity is the newly constructed Lordstown, Ohio distribution plant
expected to open on April 1, 1998. In addition, the Company leases 1.1 million
cubic feet and 4.4 million gallons of dry and liquid fertilizer capacity,
respectively, under arrangements with various fertilizer dealers and
warehouses.
The Company operates nine retail farm centers located throughout Michigan,
Indiana and Ohio. These centers, located within the same regions as the
Company's grain and wholesale fertilizer facilities, offer agricultural
fertilizer, custom application of fertilizer to farms and golf courses, and
chemicals, seeds and supplies to the farmer, many of which are also customers
of the Company's grain division. The Company has signed letters of intent to
acquire or lease four additional retail farm centers in Northwest Ohio.
In its wholesale fertilizer and retail farm center businesses, the Company
competes with regional cooperatives; fertilizer manufacturers; multi-state
retail/wholesale chain store organizations; and other independent wholesalers
of agricultural products. Many of these competitors have considerably larger
resources than the Company. Competition in the agricultural products business
of the Company is based principally on price, location and service.
Processing and Manufacturing Group
The Processing and Manufacturing Group consists of three business units:
the processing division, the manufacturing division and the ventures division.
The processing division produces and markets granular lawn fertilizer and
related products to retailers and professional lawn care companies and produces
and distributes corn cob based products to the chemical carrier, pet and
industrial markets. Retail lawn products are sold to mass merchandisers, small
independent retailers and other lawn fertilizer manufacturers. During the off-
season, ice melter products are distributed to many of the same retailers.
Professional lawn products are sold both direct and through distributors to
lawn service applicators and to golf courses. Principal raw materials for the
lawn care products are nitrogen, potash and phosphate, which are purchased
primarily from the Company's wholesale fertilizer division. The lawn products
industry is highly seasonal, with the majority of the sales occurring from
early spring to early summer. Competition is based principally on
merchandising ability, service and quality.
The Company is one of the largest producers of processed corncob products
in the United States. These products serve the chemical and feed ingredient
carrier, animal litter and industrial markets and are distributed throughout
the United States and Canada and into Europe and Asia. The principal sources
for the corncobs are the Company's grain operations and seed corn producers.
The Company's manufacturing division buys, sells, leases, rebuilds and
repairs various types of railcars. The division also provides fleet management
services to fleet owners and operates a custom steel fabrication business.
Competition for railcar marketing and fleet maintenance services are based
primarily on service and access to third party financing. Repair and
fabrication shop competition is based primarily on price, quality and location.
The Company's ventures division includes the joint venture operation of
eight Tireman auto service centers and a lawn and garden power equipment sales
and service shop.
Retail Group
The Company's Retail Group consists of six stores operated under the
trade name "The Andersons", which are located in the Columbus, Lima and
Toledo, Ohio markets and serve urban, suburban and rural customers. The
retail concept is that of a complete store for the homeowner and includes a
full line of home center products plus a wide array of other items not
available at the more traditional home center stores. In addition to hardware,
home remodeling and lawn & garden products, The Andersons stores offer
housewares, automotive, sporting goods, pet products, bath soft goods and food
(bakery, deli, produce, wine and specialty groceries). Each store carries more
than 70,000 different items, has 100,000 square feet or more of in-store
display space plus 40,000 square feet of outdoor garden center space, and has a
center aisle that features do-it-yourself clinics, special promotions and
varying merchandise displays. Remodeling of several of the stores, as well as
a reset of the product offering, was completed in 1997.
The retail merchandising business is highly competitive. The Company
competes with a variety of retail merchandisers, including numerous mass
merchandisers, home centers, department and hardware stores. The principal
competitive factors are quality of product, price, service and breadth of
selection. The Company's retail business is affected by seasonal factors with
significant sales occurring during the Christmas season and in the spring.
Research and Development
The Company's research and development program is mainly concerned with
the development of improved products and processes, primarily for the
processing division of the Processing and Manufacturing Group. The Company
expended approximately $350,000, $320,000, and $370,000 on research and
development during 1997, 1996 and 1995, respectively.
Employees
At December 31, 1997, the Company had 1,116 full-time and 1,846 part time
or seasonal employees. The Company believes its relations with its employees
are good.
Government Regulation
Grain sold by the Company must conform to official grade standards imposed
under a federal system of grain grading and inspection administered by the
United States Department of Agriculture ("USDA").
The production levels, markets and prices of the grains which the Company
merchandises are materially affected by United States government programs,
including acreage control and price support programs of the USDA. Also, under
federal law, the President may prohibit the export of any product, the scarcity
of which is deemed detrimental to the domestic economy, or under circumstances
relating to national security. Because a portion of the Company's grain sales
are to exporters, the imposition of such restrictions could have an adverse
effect upon the Company's
operations.
The Company, like other companies engaged in similar businesses, is
subject to a multitude of federal, state and local environmental protection
laws and regulations including, but not limited to, laws and regulations
relating to air quality, water quality, pesticides and hazardous materials.
The provisions of these various regulations could require modifications of
certain of the Company's existing plant and processing facilities and could
restrict future facilities expansion or significantly increase their cost of
operation. Of the Company's capital expenditures, approximately $945,000,
$720,000 and $740,000 in 1997, 1996 and 1995, respectively, were made in order
to comply with these regulations.
Item 2. Properties
The Company's principal agriculture, retail and other properties are
described below. Except as otherwise indicated, all properties are owned
by the Company.
Agriculture Facilities
Location Wholesale
Fertilizer
Grain Dry Storage Liquid
Storage Storage
(bushels) (cubic feet) (gallons)
Maumee, OH 17,270,000 4,500,000 2,646,000
Toledo, OH River (4) 7,745,000 1,800,000 2,800,000
Metamora, OH 6,860,000 --- ---
Lyons, OH (3) 380,000 47,000 160,000
Toledo, OH (1) 1,000,000 --- ---
Lordstown, OH --- 173,000 ---
Champaign, IL 13,500,000 833,000 ---
Delphi, IN 6,700,000 923,000 ---
Clymers, IN (2) 4,450,000 --- 2,156,000
Clymers, IN (3) --- 37,000 480,000
Dunkirk, IN 5,900,000 833,000 ---
Poneto, IN 620,000 --- 6,298,000
North Manchester, IN (3) --- 23,000 90,000
Logansport, IN --- 33,000 2,231,000
Walton, IN (3) --- 375,000 5,962,000
Albion, MI (3) 2,270,000 23,000 40,000
White Pigeon, MI 2,060,000 --- ---
Webberville, MI --- 1,747,000 3,916,000
Litchfield, MI (3) --- 40,000 252,000
North Adams, MI(3) --- 20,000 230,000
Union City, MI (3) --- 20,000 49,500
Munson, MI (3) -- 33,000 150,000
68,756,000 11,470,000 27,460,500
(1) Facility leased.
(2) Facility also stores soybean oil with a capacity of 61,000,000 pounds.
(3) Facility is or includes a retail farm center.
(4) Includes leased storage with a 740,000 bushel capacity
The grain facilities are mostly concrete and steel tanks, with some flat
storage, which is primarily cover-on-first termporary storage. The Company
also owns grain inspection buildings and dryers, a corn sheller plant,
maintenance buildings and truck scales and dumps.
Wholesale fertilizer and retail farm center properties consist mainly of
fertilizer warehouse and distribution facilities for dry and liquid
fertilizers. The Maumee, Ohio and Walton, Indiana locations have fertilizer
mixing, bagging and bag storage facilities. The Company also owns a seed
processing facility in Delta, Ohio. Aggregate storage capacity in the nine
retail farm centers located in Michigan, Indiana and Ohio for liquid fertilizer
and dry fertilizer is 1.5 million gallons and 243,000 cubic feet, respectively.
Retail Store Properties
Name Location Square Feet
Maumee Store Maumee, OH 131,000
Toledo Store Toledo, OH 130,000
Woodville Store (1) Northwood, OH 100,000
Lima Store (1) Lima, OH 117,000
Brice Store Columbus, OH 128,000
Sawmill Store Columbus, OH 134,000
Warehouse (1) Maumee, OH 245,000
(1) Leased
The leases for the two stores and the warehouse facility are long-term
leases with several renewal options and provide for minimum aggregate annual
lease payments approximating $1 million. The two store leases provide for
contingent lease payments based on achieved sales volume. Neither store
achieved a sales level triggering contingent lease payments in 1997, 1996 or
1995.
Other Properties
The Company owns lawn fertilizer production facilities and automated pet
food production and storage facilities in Maumee, Ohio and a lawn fertilizer
production facility in Bowling Green, Ohio. It also owns corncob processing
and storage facilities in Maumee, Ohio and Delphi, Indiana. The Company leases
a lawn fertilizer warehouse facility in Toledo, Ohio.
In its railcar business, the Company owns, leases or controls
approximately 2,800 railcars (primarily covered hopper cars) with lease terms
ranging from one to ten years and future minimum lease payments aggregating $26
million with future minimum sublease income of approximately $24 million. The
Company also owns a railcar repair facility, a steel fabrication facility, and
owns or leases a number of switch engines, cranes and other equipment.
In its ventures business, the Company owns a service and sales facility
for outdoor power equipment. Additionally, the Company participates in a joint
venture which owns or leases eight auto service centers and leases a warehouse.
The Company's administrative office building is leased under a net lease
expiring in 2005. The Company owns approximately 958 acres of land on which
various of the above properties and facilities are located; approximately 413
acres of farmland and land held for future use; approximately 5 acres of
improved land in an office/industrial park held for sale; and certain other
real estate.
Real properties, machinery and equipment of the Company were subject to
aggregate encumbrances of approximately $33 million at December 31, 1997.
Additions to property for the years ended December 31, 1997, 1996 and 1995
amounted to $15 million, $10 million, and $16 million, respectively. See Note
10 to the Company's consolidated financial statements for information as to the
Company's leases.
The Company believes that its properties, including its machinery,
equipment and vehicles, are adequate for its business, well maintained and
utilized, suitable for their intended uses and adequately insured.
Item 3. Legal Proceedings
The Company, like others in the agriculture industry, utilizes different
types of contracts with producers (including contracts commonly referred to as
"Hedged To-Arrive" or "HTA" contracts) to purchase grain. Some grain producers
have defaulted or threatened default on certain of these contracts, arguing
that their contracts are unenforceable. The Company believes that this is due,
in large part, to unprecedented high grain prices experienced in 1996. The
Company currently is engaged in litigation and/or arbitration with several
defaulting producers, including one purported class action filed on May 16,
1996 in the United States District Court for the Northern District of Illinois,
Eastern Division, Case no. 96C2936, Harter, et. al., v. Iowa Grain Company
and The Andersons Investment Services Corp., d.b.a. The Andersons, Inc.,
wherein enforceability of the delivery obligation under certain grain contracts
has been raised as an issue. The Harter lawsuit seeks declaratory and
injunctive relief and compensatory, exemplary and punitive damages of an
unspecified amount. The Court, in Harter, ordered arbitration by the National
Grain and Feed Association and dismissed Iowa Grain Company as a defendant.
The Company currently has several arbitration cases before the National Grain
and Feed Association. The Company also has received several favorable rulings
in the arbitration proceedings, including a favorable ruling in the Harter
arbitration. The Company believes its grain contracts are enforceable
obligations and intends to enforce them. Although no assurance can be given
that the current litigation and arbitration will not result in liability or
loss, the Company continues to believe that it has valid claims and defenses in
the lawsuits and proceedings in which it is involved. Because of the
favorable rulings received, this is the last time that the Company will be
reporting on the Harter case.
Pursuant to subpoenas duces tecum served by the Commodities Futures
Trading Commission (the "CFTC"), the Company has produced certain records,
including names and phone numbers of certain customers and the depositions of
certain employees and former employees have been taken in the matter of
"Certain Transactions and Practices Among Grain Elevators, et. al., Involving
Futures Contracts."
In light of the Company's current and prior use of Hedged To-Arrive
contracts, related industry-wide litigation, and current conditions in the
industry as a whole, there can be no assurance that other litigation will not
be brought or that other CFTC proceedings will not be instituted. There
currently is no reasonable basis to predict the amount of future liability or
loss, if any, that may arise from such litigation or CFTC proceedings.
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 4A. Executive Officers of the Registrant
Pursuant to General Instruction G(3) of Form 10-K, the following
information with respect to the executive officers of the registrant is
included herein in lieu of being included in the Registrant's Proxy Statement
for its Annual Meeting of Shareholders to be held May 14, 1998.
Name Position Age Year
Assumed
Christopher President, Processing and Manufacturing Group 43 1996
J. Anderson Vice President, Business Development Group 1992
General Manager, Ventures & New Business
Development 1990
Daniel T. President, Retail Group 42 1996
Anderson Director of Marketing and Merchandising,
Retail Group 1996
General Merchandise Manager, Retail Group 1991
Michael J. President and Chief Operating Officer 46 1996
Anderson Vice President and General Manager,
Retail Group 1994
Vice President and General Manager, Grain Group 1990
Richard P. Chairman of the Board and Chief Executive 68
Anderson Officer 1996
President and Chief Executive Officer 1987
Joseph L. President, Agriculture Group 47 1996
Braker Vice President and General Manager, Agriculture
Group 1994
Vice President and General Manager, Agricultural
Products Group 1990
Joseph C. Vice President, Human Resource Development 49 1996
Christen Director of Human Resource Development 1988
Dale W. Vice President - Corporate Services 53 1992
Fallat Senior Vice President, Corporate Services 1990
Philip C. Vice President, Corporate Planning 56 1996
Fox Director of Company Planning 1988
Charles E. Vice President, Personnel 56 1996
Gallagher Director of Personnel 1988
Richard R. Vice President and Controller 48 1996
George Corporate Controller 1988
Beverly J. Vice President, General Counsel and Secretary 56 1996
McBride General Counsel and Corporate Secretary 1987
Gary L. Vice President, Finance and Treasurer 52 1996
Smith Corporate Treasurer 1988
PART II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters
The information under the caption Market for Common Stock on page 7
and Shareholders on the inside back cover of The Andersons, Inc. 1997
Annual Report to Shareholders is incorporated herein by reference. No
dividends were paid in 1996. The Company paid quarterly dividends of
three cents per common share in 1997. The Company declared quarterly
dividends of four cents per common share to be paid January 21, 1998 and
April 21, 1998 to shareholders of record on January 2, 1998 and April 1,
1998.
Item 6. Selected Financial Data
The information under the caption Selected Financial Data on page 7 of The
Andersons, Inc. 1997 Annual Report to Shareholders is incorporated herein by
reference.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The information under the caption Management's Discussion and Analysis
appearing on pages 13 through 15 of The Andersons, Inc. 1997 Annual Report to
Shareholders is incorporated herein by reference.
Item 8. Financial Statements and Supplementary Data
The information under the caption Selected Quarterly Financial Data on
page 7 of The Andersons, Inc. 1997 Annual Report to Shareholders, as well as
the following consolidated financial statements of The Andersons, Inc. set
forth on pages 9 through 12 and 16 through 28 of The Andersons, Inc. 1997
Annual Report to Shareholders are incorporated herein by reference:
Consolidated Statements of Income for the years ended December 31,
1997, 1996 and 1995
Consolidated Balance Sheets as of December 31, 1997 and 1996
Consolidated Statements of Cash Flows for the years ended December
31, 1997, 1996 and 1995
Consolidated Statements of Changes in Owners' Equity for the years
ended December 31, 1997, 1996 and 1995
Notes to Consolidated Financial Statements
Following is the Report of Independent Auditors on the Consolidated
Financial Statements and schedule:
Report of Independent Auditors
Board of Directors
The Andersons, Inc.
We have audited the accompanying consolidated balance sheets of The Andersons,
Inc. and subsidiaries as of December 31, 1997 and 1996, and the related
consolidated statements of income, cash flows and changes in owners' equity for
each of the three years in the period ended December 31, 1997. Our audits also
included the financial statement schedule listed in the index at Item 14(a).
These financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial
position of The Andersons, Inc. and subsidiaries at December 31, 1997 and
1996, and the consolidated results of their operations and their cash flows for
each of the three years in the period ended December 31, 1997, in conformity
with generally accepted accounting principles. Also, in our opinion, the
related financial statement schedule, when considered in relation to the basic
financial statements taken as a whole, presents fairly in all material respects
the information set forth therein.
/s/ERNST & YOUNG LLP
Toledo, Ohio
January 26, 1998
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
For information with respect to the executive officers of the
registrant, see "Executive Officers of the Registrant" in Item 4A
included in Part I of this report. For information with respect to the
Directors of the registrant, see "Election of Directors" in the Proxy
Statement for the Annual Meeting of the Shareholders to be held on May
14, 1998 (the "Proxy Statement"), which is incorporated herein by
reference; for information concerning 1934 Securities and Exchange Act
Section 16(a) Compliance, see such section in the Proxy Statement,
incorporated herein by reference.
Item 11. Executive Compensation
The information set forth under the caption "Executive Compensation" in
the Proxy Statement is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information set forth under the caption "Security Ownership"
in the Proxy Statement is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
None
PART IV
Item 14. Financial Statement Schedules and Reports on Form 8-K
(a) (1) The consolidated financial statements of the Company, as set
forth under Item 8 of this report on Form 10-K, are incorporated herein by
reference from The Andersons, Inc. 1997 Annual Report to Shareholders.
(2) The following consolidated financial statement schedule is
included in Item 14(d):
Page
II. Consolidated Valuation and Qualifying Accounts - years
ended December 31, 1997, 1996 and 1995 14
All other schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission are not
required under the related instructions or are inapplicable, and therefore
have been omitted.
(3) Exhibits:
2.1 Agreement and Plan of Merger, dated April 28, 1995 and amended as
of September 26, 1995, by and between The Andersons Management
Corp. and The Andersons. (Incorporated by reference to Exhibit 2.1
to Registration Statement No. 33-58963).
3.1 Articles of Incorporation. (Incorporated by reference to Exhibit
3(d) to Registration Statement No. 33-16936).
3.4 Code of Regulations of The Andersons, Inc. (Incorporated by
reference to Exhibit 3.4 to Registration Statement No. 33-58963).
4.3 Specimen Common Share Certificate. (Incorporated by reference to
Exhibit 4.1 to Registration Statement No. 33-58963).
4.4 The Fifteenth Supplemental Indenture dated as of January 2, 1995,
between The Andersons, Inc. and Fifth Third Bank of Northwestern
Ohio, N.A., successor Trustee to an Indenture between The
Andersons and Ohio Citizens Bank, dated as of October 1, 1985.
(Incorporated by reference to Exhibit 4.4 to registrant's 1995
Annual Report on Form 10-K).
10.1 Management Performance Program. *(Incorporated by reference
to Exhibit 10(a) to the Partnership's Form 10-K dated December 31,
1990, File No. 2-55070).
10.2 The Andersons, Inc. Long-Term Performance Compensation Plan
* (Incorporated by reference to Appendix B to Registration
Statement No. 33-58963).
10.3 The Andersons, Inc. Employee Share Purchase Plan *(Incorporated by
reference to Appendix C to Registration Statement No. 33-58963).
13 The Andersons, Inc. 1997 Annual Report to Shareholders
22 Subsidiaries of The Andersons, Inc.
23.1 Consent of Independent Auditors
* Management contract or compensatory plan.
The Company agrees to furnish to the Securities and Exchange Commission a
copy of any long-term debt instrument or loan agreement that it may request.
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the last quarter of the year.
(c) Exhibits:
The exhibits listed in Item 14(a)(3) of this report, and not
incorporated by reference, follow "Financial Statement Schedule"
referred to in (d) below.
(d) Financial Statement Schedule:
The financial statement schedule listed in 14(a)(2) follows
"Signatures".
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized, in Maumee, Ohio,
on the 27th day of March, 1998.
THE ANDERSONS, INC. (Registrant)
By /s/Richard P. Anderson
Richard P. Anderson
Chairman of the Board and Chief Executive
Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant on the 27th day of March, 1998.
Signature Title Date
Chairman of the Board
/s/Richard P. Anderson Chief Executive Officer
Richard P. Anderson (Principal Executive Officer) March 27, 1998
/s/Richard R. George Vice President and Controller
Richard R. George (Principal Accounting Officer) March 27, 1998
/s/Gary L. Smith Vice President, Finance
Gary L. Smith and Treasurer
(Principal Financial Officer) March 27, 1998
____________________ Director
Donald E. Anderson
/s/Michael J. Anderson Director
Michael J. Anderson March 27, 1998
/s/Richard M. Anderson Director
Richard M. Anderson March 27, 1998
/s/Thomas H. Anderson Director
Thomas H. Anderson March 27, 1998
_____________________ Director
John F. Barrett
/s/Paul M. Kraus Director
Paul M. Kraus March 27, 1998
_____________________ Director
Donald L. Mennel
/s/Donald M. Mennel Director
Donald M. Mennel March 27, 1998
_____________________ Director
David L. Nichols
/s/Sidney A. Ribeau Director
Dr. Sidney A. Ribeau March 27, 1998
_____________________ Director
Charles A. Sullivan
Except for those portions of The Andersons, Inc. 1997 Annual Report to
Shareholders specifically incorporated by reference in this report on Form 10-
K, such annual report is furnished solely for the information of the Securities
and Exchange Commission and is not to be deemed "filed" as a part of this
filing.
<TABLE>
<CAPTION>
SCHEDULE II - CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS
THE ANDERSONS, INC.
Additions
---------------------------
Balance at Charged to Charged to Balance
Beginning Costs and Other Accounts Deductions at End
Description of Period Expenses - Describe -Describe of Period
<S> <C> <C> <C> <C> <C>
Allowance for doubtful accounts receivable:
Year ended December 31, 1997 $3,230,000 $1,680,523 $ - $1,953,523(1) $2,957,000
Year ended December 31, 1996 3,514,000 4,321,994 - 4,605,994(1) 3,230,000
Year ended December 31, 1995 2,292,000 2,220,830 - 998,830(1) 3,514,000
Allowance for doubtful notes receivable:
Year ended December 31, 1997 $ 735,000 $ 86,409 $ - $ 44,409(1) $ 777,000
Year ended December 31, 1996 1,277,000 - - 542,000(1) 735,000
Year ended December 31, 1995 727,000 550,000 - - 1,277,000
(1) Uncollectible accounts written off, net of recoveries
</TABLE>
1997 Annual Report
Diversified, Dynamic, Driven
Corporate Profile
The Andersons, Inc. (Nasdaq: ANDE) is a diversified Agribusiness and Retailing
Company with annual revenues of $1 billion.
The Company, which began operations in Maumee, Ohio in 1947 with one grain
elevator and 500,000 bushels of storage capacity, today has three operating
groups: Agriculture, Processing & Manufacturing and Retail.
1997 Accomplishments and Highlights
- - - Record per share fourth quarter results at $0.68
- - - 2nd, 3rd and 4th quarters show successive year-to-year increases
- - - Cash dividend started in 1997 and increased 33% in 1st quarter 1998
- - - Repurchased over 400,000 common shares from the open market
- - - Railcar business unit had significant growth in revenue and earnings
- - - Increased railcar fleet by 25%, now over 2,800 railcars
- - - Selling lawn fertilizer to several of the nation's largest lawn and garden
retailers
- - - Ended 1997 with twice as much grain inventory when compared to 1996 (which
should benefit 1998 performance)
- - - Purchased the Clymers, Indiana grain elevator (previously leased)
- - - Started construction on a fertilizer distribution plant in a new location
at Lordstown, Ohio
- - - Purchased assets of Blondes Farm Supply (previously leased)
- - - 90% complete on Retail Group's renovations and merchandise resets
- - - Five of our six Retail stores now offer drive-through customer service
- - - Developed a Year 2000 Compliance Plan and targeted completion dates
Visit our website at www.andersonsinc.com
Table of Contents
Highlights 1
Letter to Shareholders 2-3
Agriculture Group 4
Processing & Manufacturing Group 5
Retail Group 6
Selected Financial Data 7
Audited Consolidated Financial Statements 8-12
Management's Discussion & Analysis 13-15
Notes to Consolidated Financial Statements 16-28
Officers & Directors Data Inside Back
Welcome to our new and continuing shareholders! We appreciate your vote of
confidence!
The Andersons, Inc.
Financial Highlights
(in thousands, except for per
share & performance data) 1997 1996 % Change
OPERATIONS
Grain sales & revenues $566,373 $ 700,326 -19.1%
Fertilizer, retail & other sales 427,373 449,978 -5.0%
Other income 5,099 4,652 9.6%
Total sales & revenues 998,845 1,154,956 -13.5%
Gross profit - grain 33,787 41,082 -17.8%
Gross profit - fertilizer, retail & other 113,901 118,149 -3.6%
Total gross profit 147,688 159,231 -7.2%
Income before income taxes & asset
impairment 7,376 11,891 -38.0%
Asset impairment 1,121 --
Net income 4,074 6,406 -36.4%
Effective tax rate 34.9% 46.1% -24.3%
PER SHARE DATA
Income before asset impairment $ 0.59 $ 0.76 -22.4%
Asset impairment charge 0.09 --
Net income 0.50 0.76 -34.2%
PERFORMANCE
Pre tax return on beginning equity* 10.1% 17.7%
Net income return on beginning equity** 5.6% 9.6%
Long-term debt to equity ratio*** 0.95-to-1 0.97-to-1
Weighted average shares outstanding 8,160,000 8,425,000
Number of employees 2,962 3,024
*Before asset impairment charge
**After asset impairment charge
***Including pension & post-retirement benefits
[Pie Graphs]
`97 Beginning Allocated Capital `97 Revenues `97 Operating Income
Total $150.6 million $1 billion $7.6 million
Agriculture $68.4 72.6% 30.3%
Processing &
Manufacturing $32.7 10.4% 63.2%
Retail $44.5 17.0% 6.5%
Other $ 5.0 -- --
Letter to Shareholders
We are pleased to report another dynamic year for The Andersons. Just a short
50 years ago Harold Anderson started our Company with a vision of providing
extraordinary customer service that lives on today. The business started
from a small half-million bushel grain elevator in Maumee, Ohio, and grew to a
billion-dollar agribusiness, processing and manufacturing business, and retail
mass merchandiser. Harold would certainly be proud of the success and growth
that The Andersons has attained in the past five decades. History is
important, and we celebrate it with humble reverence, but our focus is clearly
on the future. As we begin our sixth decade, we believe the Company is poised
for continued growth and prosperity.
1997 was a difficult year in terms of income and revenue. Business conditions
in both Agriculture and Retail Groups were challenging. However, once again,
our diversification has paid off. For the second consecutive year, the
Processing & Manufacturing Group (PMG) was the Company's top performer.
Manufacturing's railcar marketing unit showed significant growth with record
sales and earnings this year. The lawn products unit met its 1997 target and
recently added new 1998 business that shows promise for increased
performance in the future.
Total revenues for 1997 decreased 13.5% from 1996 to $1 billion. The reduction
was principally due to grain prices and bushels sold, both of which were lower
than the previous year's levels. Excluding a one-time non-cash asset
impairment charge, pretax income was down 38% to $7.4 million, resulting in a
pretax return on equity of 10% compared with our goal of 25%. Net income was
$4.8 million before the $732,000 tax-effected, non-cash asset impairment
charge. Earnings per share before the asset impairment charge were 59 cents
(50 cents net of the charge) versus 76 cents in 1996.
The Company experienced a record first quarter net loss of $4.1 million,
attributable primarily to the second successive year of poor crops in parts of
the eastern corn belt. Due to plenty of hard work from our 3,000 dedicated
employees, the last three quarters of 1997 showed successive year-to-year
earnings increases. Conditions are right for this trend to continue into 1998.
The Company enjoyed strong cash flow during the year that allowed us to spend
over $15 million on capital projects, repurchase over 400,000 of our common
shares, and pay dividends of 12 cents per share, while at the same time
maintaining a strong balance sheet. Long-term debt declined by more than $3
million in 1997. We ended the year with a funded long-term debt-to-equity
ratio of .95 to 1 compared to our long-term goal of .8 to 1; a goal we believe
can be accomplished in a reasonable period of time.
We ended 1997 with total assets in excess of $368 million compared with assets
of $347 million in 1996. The increase is due primarily to added grain
inventories that will have a positive impact on 1998's performance.
Shareholders enjoyed their first dividend of 3 cents per quarter during the
year. In addition, we increased the dividend 33% during the first quarter of
1998 to 4 cents per share. Shareholders' equity declined slightly during the
year as a result of share repurchases of $4.2 million.
The Processing & Manufacturing Group's manufacturing division was our best
performer in 1997, with record sales and profits. The division's railcar
business unit buys, repairs, maintains, sells and leases railcars for the
grain, chemical, plastic, salt, fertilizer and mining industries.
During the year we increased our fleet to 2,800 cars, a 25% increase. We have
been able to acquire used railcars, refurbish the cars to customer
specifications where necessary and structure long-term leases with quality
lessees. Historically, with our roots in the grain industry, the majority of
our railcar business has been concentrated in covered grain-hopper cars.
However, most of the recent growth is providing us with a diversified railcar
portfolio and customer base outside the grain industry. Hats off to our
creative employees working in this very successful division. We expect the
railcar business unit to continue this rate of growth in 1998.
The processing division's lawn products business unit had a good year as well.
We recently added a major national account to our list of lawn products'
customers which now includes four of the five top lawn and garden retailers in
America. In addition, our professional lawn product line, sold under the Tee
Time label, is one of the top five golf course fertilizer brands in America,
with approximately 10% of total market share. The industrial lawn and garden
business has made solid progress as well. The lawn and garden fertilizer
industry is going through stages of consolidation. We believe The Andersons is
a long-term player in the lawn and garden industry and we are closely
evaluating the industry developments to secure our appropriate position.
The processing division's industrial products unit continues its development
efforts in the pet litter product category. We are in the product development
and test marketing stages, trying to find the right strategy and distribution
channels for these value added corn-cob based products.
The Agriculture Group (Ag) had mixed results in 1997. Our core grain business
suffered with low inventories during most of the year. However, the 1997 fall
harvest was excellent in our marketing area. Nationwide, the corn harvest was
the third best in history and the soybean harvest set an all-time record. The
huge fall harvest allowed us to fill the elevators, almost to operating
capacity, by year end; 52 million bushels were in-store at the end of 1997
versus 27 million bushels at the end of 1996. This should have a very positive
impact in 1998.
Ag's two fertilizer divisions, wholesale and retail farm centers, are adding
capacity in 1998. A wholesale fertilizer plant is under construction at a new
location in Lordstown, Ohio, and we acquired two retail farm centers in
Hillsdale and North Adams, Michigan, that were previously leased. In addition,
we recently signed letters of intent to acquire or lease retail farm centers in
Northwestern Ohio. We expect additional growth in retail farm centers,
mainly through acquisition.
Worldwide demand for agriculture products continues to grow driven principally
by population growth, higher standards of living, a desire for improved diets
and a generally improving worldwide economy. There is turbulence in the
Asian financial markets, which may delay the growth in these regions, but long-
term we remain optimistic. The United States does not have a huge supply of
excess grain, which generally means a high percentage of tillable acres will
most likely be in production in 1998. We stand ready to provide and serve the
industry with farm inputs and assist the farmers and dealers with solid
marketing plans to maximize the value of their grain production.
The North American grain industry continues to go through historic
consolidation, joint venturing and announcements of strategic alignments.
Added value food manufacturers, grain processors and grain exporters are
aligning themselves with grain elevators that can provide the feedstock for
their livelihood. We are watching the consolidation closely to determine our
best position in the industry.
The Retail Group sharpened its customer focus in 1997. The capital projects
announced in 1996 involving expansion, remodeling and merchandise resets are
90% complete. Several stores were in various stages of this process during
1997, which can be disruptive to both customers and employees. We now have
expanded product offerings in hardware, home remodeling and flooring. Five of
our six stores have drive-through customer loading facilities that include a
"we load it" program. Several of our stores now have additional customer
entrances and check-out facilities that are far more convenient than the
traditional single entrance used by most home improvement centers. We are
rolling out a new in-store signage package to improve the customer's ability to
find merchandise and customer service assistance. Our in-stock performance has
improved to 94%, and our goal is to be at 97% within the next 12 months. We
have also implemented an automated replenishment system to improve the accuracy
and reduce the cost of ordering product, plus improve inventory turns.
Several important Administrative issues are being addressed in 1998. One issue
all companies face is year 2000 compliance (Y2K). Our plans are to complete
the necessary software modifications by early 1999 which should give us
adequate time for system testing. Our Y2K plans also include the installation
of enterprise resource planning software for certain divisions and
applications. During 1998, we plan to add The Andersons common shares as an
investment option for employees participating in our 401(k) plan. We are also
reviewing the use of a dividend re-investment program for the benefit of all
investors.
Harold Anderson was a visionary in business and customer service. He
persevered when dealing with the difficult issues every business faces from
time to time. He was devoted to his family and loyal to the thousands of
employees who helped make The Andersons a success. His vision lives on in the
culture he created and nurtured from 1947 to 1968 when he passed away. We
strive to live up to his ideals, which are part of the Mission Statement that
guides many of our decisions today. We are indebted to our customers,
employees and shareholders for their support of our past successes, and we
fully expect to earn your continued support in the future.
Sincerely,
/s/Mike /s/Dick
Michael Anderson Richard Anderson
President & Chief Operating Officer Chairman & Chief Executive Officer
Agriculture Group
The Agriculture Group operates grain elevators in Ohio, Michigan, Indiana and
Illinois; wholesale fertilizer terminals in the same Eastern Corn Belt region
which distribute dry and liquid agricultural fertilizer products; and retail
farm centers in Michigan, Ohio and Indiana that sell agricultural fertilizer,
crop protection chemicals and seed as well as field application services.
The group's total revenue declined by $141 million, or 16.2%, in 1997 due
almost entirely to lower average grain prices and fewer bushels shipped.
Operating income was down 38%, from $3.7 million in 1996 to $2.3 million in
1997. Important to note, is the fact that a large year-to-year earnings
decline was incurred in the first three months of the year. This was a direct
result of two successive poor grain harvests in parts of our region. In each
of the last three quarters of 1997, operating income improved from the
corresponding three-month period of 1996. This positive trend is expected to
continue into 1998.
As described above, grain revenues were significantly lower in 1997 because of
lower prices throughout most of the year. Following the weak period early in
the year, conditions improved. Farmers in our region had an excellent wheat
harvest last summer and the same was generally true for the corn and soybean
crops last fall. As a result, bushel receipts were up 14.7% for the year.
These improving conditions also enabled us to realize a good return on our
storage space for the second half of the year. By year-end our grain
inventories were almost double year-earlier levels, and our elevators were
approaching their practical operating capacity. Wholesale fertilizer tonnage
sales, total revenues and operating income in 1997 were down from
1996 levels. Unlike previous years when rising prices encouraged early dealer
buying, generally declining price levels in the past year prompted delays in
dealer orders. This shift hurt our results in 1997 but doesn't necessarily
represent a long-term trend. We anticipate growth in 1998 and beyond.
Construction of a fertilizer terminal in Lordstown, Ohio, began late in 1997.
It will be open this spring to serve customers in eastern Ohio and
Pennsylvania.
Our retail farm centers achieved growth in application acres, total revenues
and income in 1997. During the year we purchased two outlets which had
previously been leased and signed letters of intent to acquire Crop & Soil
Service, Inc. which operates three retail farm centers in Northwest Ohio, and
to lease a retail farm center near Bryan, Ohio.
We believe that the long-term outlook for worldwide demand for food products
offers a solid future for our Agriculture Group. In addition to growing demand
for grain and crop production inputs, ongoing consolidation in the industry
clearly represents opportunity for our company.
[Bar Graphs] In Millions of Dollars
1993 1994 1995 1996 1997
Sales & Revenues $571 $711 $831 $869 $728
Operating Income 9.2 12.3 6.0 3.7 2.3
Unit Volume
1993 1994 1995 1996 1997
Grain Bushels Received (Millions) 130 144 163 126 145
Grain Bushels Shipped (Millions) 127 152 168 136 124
Wholesale Fertilizer Tons Handled (000) 894 960 977 841 1004
Processing & Manufacturing Group
The Processing & Manufacturing group consists of three operating divisions.
The processing division producers and markets granular lawn care products for
consumer, golf and professional lawn care markets, and numerous corn cob based
products including chemical and feed ingredient carriers, animal bedding and
pet litter products. The manufacturing division buys, sells leases, rebuilds
and repairs various types of railcars, offers fleet management services to
private fleet owners and operates a custom steel fabrication business. The
ventures division operates seven Tireman Automotive Service Centers in the
Toledo area as well as a lawn and garden equipment dealer.
Total group revenue declined from $113 million in 1996 to $104 million in 1997,
due primarily to the sale of its SorbentsTM business in late 1996. Revenue
from ongoing operations was relatively flat with healthy gains in rail
leasing and Tireman, offsetting a downturn in the professional lawn fertilizer
segment. Despite the revenue decline, operating income for the Processing &
Manufacturing Group in 1997 matched the $4.8 million earned in 1996. While
processing division income declined, both the railcar leasing segment and the
ventures division realized solid earnings growth.
The processing division's operating income declined for two primary reasons: 1)
increased raw material costs due to a tight cob supply situation and 2) the
loss of a large professional lawn fertilizer customer who switched from
granular to liquid products when it merged with a competitor. On a positive
note, this division continued the development of new products which hold
promise for future growth and commenced production and nationwide distribution
of a line of exclusive brand lawn care products for another of the major big-
box retailers.
The manufacturing division continued its exciting growth trend with a 25%
increase in fleet size, the addition of several new customers and a planned
diversification into new industries and car types to balance its past reliance
on cars that primarily serve agriculture. In addition to this diversification
strategy, prudent risk management in this business includes meticulous
attention to credit quality. Continued growth is foreseen in this business.
The ventures division achieved solid revenue and income growth in its
Tireman Auto Centers and improved profitability in its lawn and garden power
equipment outlet. Group operating income was also strengthened from the sale
of some excess real estate in 1997.
[Bar Graphs] In Millions of Dollars
1993 1994 1995 1996 1997
Sales Mix
Processing $53.3 $63.3 $66.5 $75.5 $62.5
Manufacturing 7.8 14.0 20.4 21.2 25.2
Ventures & Other 18.0 17.3 17.7 15.9 16.4
Total $79.1 $94.6 $104.6 $112.6 $104.1
Operating Income $4.4 $3.2 $3.7 $4.8 $4.8
Retail Group
The Retail Group operates six large stores in Ohio: three in the Toledo area,
two in Columbus and one in Lima. Each store has 100,000+ square feet of
instore display space as well as an extensive outdoor lawn and garden center.
Our unique concept is a complete home store. In addition to the traditional
home center offerings of hardware, plumbing, electrical, paint, building
supplies, kitchen and bath remodeling, flooring and garden products, we carry
housewares, bed and bath soft goods, pet supplies, sporting goods and
automotive supplies as well as our "Uncommon Market" which consists of a
bakery, deli, produce section, specialty foods and wine. Five of the stores
also have drive-through customer loading facilities.
The group's same store sales declined by $6 million or 3.4% for the year, from
$176 million in 1996 to $170 million in 1997. As a result, gross profit and
operating income were also down. Operating income for the Retail Group was
$0.5 million in 1997 before a one-time non-cash charge of $1.1 million
($732,0000 after-tax) to write down certain assets. This charge recognizes
impairment losses on long-term assets when carrying values exceed expected
future cash flows.
Some of the reduction in sales resulted from unseasonable weather patterns.
Last spring's lawn and garden business was affected by a succession of cool and
wet weekends, and sales of cold weather goods like snowblowers suffered from
the absence of winter weather in the fourth quarter. Competition also was a
factor as we saw new players enter the marketplace in Toledo and Lima. Sales
were also impacted by the disruption caused by major store renovation
projects and merchandising resets in several of our stores during 1997. These
changes, including expanded product offerings in categories such as home
remodeling, hardware, flooring and bed and bath domestics, are designed to make
our stores much easier to shop. These changes are expected to improve our
business volume in 1998 and beyond.
Systems improvements implemented during the past year have already improved
merchandise in-stock performance levels by 5 percentage points, automated
replenishment on certain products and reduced overall inventory levels.
With our sharpened customer focus, enhanced product offering and improved
merchandising and systems, the Retail Group expects to achieve sales and
operating margin growth in 1998.
[Bar Graphs] In Millions of Dollars
1993 1994 1995 1996 1997
Sales Volume $153 $169 $168 $176 $170
Operating Income 0.4 2.3 1.8 3.8 0.5
Selected Financial Data
1997 1996 1995 1994 1993
(in thousands, except for
per share data)
Operating Results
Total sales and revenues $998,845 $1,154,956 $1,097,730 $971,638 $800,345
Income from continuing
operations (a) 4,074(d) 6,406(e) 6,273 9,285 6,986
Per share data:
Income from continuing
operations(b) .50 .76 .74 1.10 .83
Dividends paid (c) .12 - - - -
Balance Sheet Data
Total assets $368,244 $346,591 $455,518 $344,809 $360,586
Working capital 53,595 61,649 58,897 57,623 47,795
Long-term debt 65,709 68,568 74,139 71,217 52,259
Shareholders' equity 72,201 73,249 67,260 64,870 56,256
(a) Includes pro forma income taxes of $3,915 thousand, $5,886 thousand, and
$4,094 thousand for 1995, 1994 and 1993, respectively. See Note 1 to the
consolidated financial statements of the Company.
(b) Amounts are net of pro forma income taxes of $.47, $.70, and $.48 for 1995,
1994 and 1993, respectively. Amounts for 1993 through 1995 were calculated
using the actual number of shares that were outstanding on the date of the
merger.
(c) There were no dividends paid in 1996. Distributions made to partners prior
to 1996 are not included in this table.
(d) Non-recurring charge of $1.1 million for asset impairment is included ($.7
million after tax).
(e) Income taxes for 1996 include a charge of $.8 million to establish deferred
income taxes on the assets and liabilities of the Partnership.
SELECTED QUARTERLY FINANCIAL DATA AND MARKET FOR COMMON STOCK
The following table presents selected unaudited quarterly financial data for
the years ended December 31, 1997 and 1996. The high and low bid prices for
the Company's Common Stock are as quoted on the Nasdaq National Market System
from February 20, 1996 (the Company's first day of trading) to December 31,
1997. Such quotations reflect inter-dealer prices, without retail mark-up,
mark-down or commission and may not represent actual transactions.
(in thousands, except per share data)
Quarter Net Gross Net Income (loss) Common Stock Quote Dividends
Ended Sales Profit Amount Per Share High Low Declared
1997
March 31 $186,765 $27,317 $(4,082) $(.49) $9.625 $8.625 $.03
June 30 250,190 42,884 4,259 .52 9.500 8.625 .03
September 30 161,929 30,797 (1,529) (.19) 9.500 8.125 .03
December 31 399,961 46,690 5,426 .68 9.500 8.750 .04
Year 998,845 147,688 4,074 .50 .13
1996
March 31 256,714 39,733 1,269 .15 17.680 9.750 -
June 30 345,229 41,979 1,380 .16 11.000 8.750 -
September 30 227,651 31,109 (1,806) (.21) 9.500 8.000 -
December 31 325,362 46,410 5,563 .66 9.500 7.250 .03
Year 1,154,956 159,231 6,406 .76 .03
Report of Independent Auditors
Board of Directors
The Andersons, Inc.
We have audited the accompanying consolidated balance sheets of The Andersons,
Inc. and subsidiaries as of December 31, 1997 and 1996, and the related
consolidated statements of income, cash flows and changes in owners' equity for
each of the three years in the period ended December 31, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of The Andersons,
Inc. and subsidiaries at December 31, 1997 and 1996, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1997 in conformity with generally accepted
accounting principles.
/s/Ernst & Young LLP
Toledo, Ohio
January 26, 1998
The Andersons, Inc.
Consolidated Statements of Income
Year ended December 31
(in thousands, except per share data) 1997 1996 1995
Grain sales and revenues $ 566,373 $ 700,326 $ 660,121
Fertilizer, retail and other sales 427,373 449,978 432,289
Other income 5,099 4,652 5,320
998,845 1,154,956 1,097,730
Cost of grain sales 532,586 659,244 617,934
Cost of fertilizer, retail and other sales 318,571 336,481 326,242
851,157 995,725 944,176
Gross profit 147,688 159,231 153,554
Operating, administrative and general
expenses 131,818 133,637 129,210
Asset impairment charge 1,121 -- --
Interest expense 8,494 13,703 14,019
141,433 147,340 143,229
Income before income taxes 6,255 11,891 10,325
Income taxes 2,181 5,485 137
Net income $ 4,074 $ 6,406 10,188
Pro forma income taxes (See Note 1) 3,915
Pro forma net income $ 6,273
Per common share (Pro forma for
1995 - See Note 1):
Basic and diluted earnings $ .50 $ .76 $ .74
Dividends paid $ .12 $ -- $ --
Weighted average shares outstanding 8,160 8,425 8,430
The Notes to the Consolidated Financial Statements
on pages 16-28 are an integral part of this statement.
The Andersons, Inc.
Consolidated Balance Sheets
December 31
(in thousands) 1997 1996
Assets
Current assets:
Cash and cash equivalents $ 8,278 $27,524
Accounts and notes receivable:
Trade receivables, less allowance for doubtful
accounts of $2,957 in 1997; $3,230 in 1996 68,643 73,694
Margin deposits 771 327
69,414 74,021
Inventories 191,467 150,297
Deferred income taxes 1,408 1,864
Prepaid expenses 4,521 3,929
Total current assets 275,088 257,635
Other assets:
Notes receivable and other assets, less allowance for
doubtful notes receivable of $777 in 1997; $735 in 1996 6,333 5,951
Investments in and advances to affiliates 1,026 1,340
7,359 7,291
Property, plant and equipment (net) 85,797 81,665
$368,244 $346,591
Liabilities and owners' equity
Current liabilities:
Notes payable $ 15,572 $ --
Accounts payable for grain 121,233 96,932
Other accounts payable 63,309 75,713
Accrued expenses 12,973 16,981
Current maturities of long-term debt 8,406 6,360
Total current liabilities 221,493 195,986
Pension and postretirement benefits 2,799 2,804
Long-term debt, less current maturities 65,709 68,568
Deferred income taxes 5,393 5,371
Minority interest 649 613
Shareholders' equity
Common shares, without par value
Authorized -- 25,000 shares
Issued -- 8,430 shares at stated value
of $.01 per share 84 84
Additional paid-in capital 66,660 66,659
Treasury shares (491 and 70 in 1997 and 1996, respectively) (4,418) (600)
Retained earnings 9,875 7,106
72,201 73,249
$368,244 $346,591
The Notes to the Consolidated Financial Statements
on pages 16-28 are an integral part of this statement.
The Andersons, Inc.
Consolidated Statements of Cash Flows
Year ended December 31
(in thousands) 1997 1996 1995
Operating activities
Net income, as reported $4,074 $ 6,406 $10,188
Adjustments to reconcile net income, as
reported, to net cash provided by
(used in) operating activities:
Depreciation and amortization 10,065 9,730 9,318
Provision for losses on accounts and
notes receivable 1,767 4,322 2,229
Asset impairment charge 1,121 -- --
Gain on sale of property, plant and
equipment (529) (182) (2,568)
Deferred income taxes 478 2,766 --
Other 36 (491) (70)
Changes in operating assets and
liabilities:
Trade accounts receivable 2,839 10,772 (38,775)
Inventories (41,170) 119,633 (71,295)
Prepaid expenses and other assets (1,242) (1,875) 815
Accounts payable for grain 24,301 2,848 10,240
Other accounts payable and accrued
expenses (16,737) 5,335 19,818
Net cash provided by (used in)
operating activities (14,997) 159,264 (60,100)
Investing activities
Purchases of property, plant and equipment (15,427) (9,955) (11,894)
Proceeds from sale of property, plant
and equipment 1,221 720 1,242
Sales and maturities of investments, net
of $101 purchased in 1995 -- 366 464
(Advances to) payments received from
affiliates -- (29) 518
Acquisition of business, net of cash
acquired -- -- (1,427)
Net cash used in investing activities (14,206) (8,898) (11,097)
Financing activities
Net increase (decrease) in short-term
borrowings 15,572 (120,267) 68,578
Proceeds from issuance of long-term debt 150,982 140,780 56,570
Payments of long-term debt (151,795) (147,743) (49,616)
Proceeds from sale of treasury shares to
employees participating in Employee
Share Purchase Plan 423 -- --
Dividends paid (985) -- --
Purchase of common shares for the treasury (4,240) (600) --
Payments to partners and shareholders
and other deductions from owners' equity
accounts, net of $1,350 invested in 1995 -- (64) (6,206)
Net cash provided by (used in)
financing activities 9,957 (127,894) 69,326
Increase (decrease) in cash and cash
equivalents (19,246) 22,472 (1,871)
Cash and cash equivalents at beginning
of year 27,524 5,052 6,923
Cash and cash equivalents at end of year $ 8,278 $ 27,524 $ 5,052
Noncash operating, investing and financing activities:
Exchange of fixed assets for investment $ 513
Exchange of convertible employee bonds
for common shares $ 275
Acquisition of business:
Working capital, other than cash $ 90
Property, plant and equipment 4,096
Short and long-term debt assumed (2,070)
Deferred tax liabilities assumed (689)
Net cash expended $ 1,427
Donation of land to charity $ 1,648
Notes received on sale of land $ 2,431
The Notes to the Consolidated Financial Statements
on pages 16-28 are an integral part of this statement.
The Andersons, Inc.
Consolidated Statements of Changes in Owners' Equity
Converted Equity
The
Andersons
The Management
Andersons Corp. Additional
Partners' Common Common Paid-in Treasury Retained
(in thousands) Capital Shares Shares Capital Shares Earnings Total
Balances at $63,008 $1,391 $ -- $ -- $ -- $ 471 $64,870
January 1, 1995
Net income as
reported 9,960 228 10,188
Distributions and
other changes (7,812) (15) 29 (7,798)
Balances at December
31, 1995 65,156 1,376 -- -- -- 728 67,260
Merger transaction:
Issuance of 8,399
thousand shares to
convert equity (65,092) (1,376) 84 66,384 --
Payments to
dissenting partners
and for
fractional shares (64) (64)
Issuance of 31
thousand shares
to convert 275 275
employee bonds
Balances at
January 2, 1996 -- -- 84 66,659 -- 728 67,471
Net income 6,406 6,406
Purchase of 70
thousand shares
for treasury (600) (600)
Sale of available-
for-sale securities (28) (28)
Balances at
December 31, 1996 -- -- 84 66,659 (600) 7,106 73,249
Net income 4,074 4,074
Sale of 49 thousand
shares to Employee
Share Purchase Plan
participants 1 422 423
Purchase of 470
thousand shares
for treasury (4,240) (4,240)
Dividends declared (1,305) (1,305)
Balances at
December 31, 1997 $ -- $ -- $ 84 $66,660 $(4,418) $ 9,875 $72,201
The Notes to the Consolidated Financial Statements
on pages 16-28 are an integral part of this statement.
Management's Discussion and Analysis
Operating Results
Operating results for The Andersons, Inc. business segments are discussed in
the Business Review on pages 4-6 of this annual report. In addition, Note 13
to the consolidated financial statements displays sales and revenues, operating
profit, identifiable assets, capital expenditures and depreciation and
amortization for each of the Company's three business segments. The following
discussion focuses on the consolidated operating results as shown in the
Consolidated Statements of Income.
Comparison of 1997 with 1996
Sales and revenue for 1997 totaled $1 billion, a decrease of $156 million
or 13.5% from 1996. Sales in the Agriculture Group were down $138.4 million,
with the grain division down 19.1% and the fertilizer divisions down 4.9%.
Grain shipment volume decreased approximately 9.0% from 1996 and the average
price per bushel shipped dropped 11.1%. The majority of the volume decrease
resulted from low carryover of grain stocks from poor harvests in 1995 and
1996. The decrease in average selling price reflects very high market
prices in the fall of 1995 through late spring of 1996. Wholesale fertilizer
experienced a 5.4% volume decrease and a decrease of 2.1% in average prices,
while the retail farm center sales and revenues were up 5% from 1996.
The Processing and Manufacturing Group ("PMG") had an $8.5 million or
7.8% decrease in sales. The processing division had the largest decrease of
$12.2 million or 16.7%. Of this decrease $9.4 million represented 1996
combined sales of the SorbentsTM business that was sold in the fourth quarter
of 1996 and lawn fertilizer retail businesses that are no longer being operated
by the Company. The remainder of the decrease resulted from lower volumes.
The manufacturing division had increased sales of $3.9 million or 18.7%. The
Retail Group experienced a 3.4% decrease in sales, with all markets down. This
was due to increased competition and a slow Christmas selling season.
Gross profit for 1997 totaled $148 million, a decrease of $11.5 million
or 7.2% from 1996. The grain division had a gross profit decrease of $7.3
million, due primarily to the volume decrease noted previously. Merchandising
revenues from blending and storing grain for others are rising from the past
two years of weak results due to poor harvests and fewer bushels to handle.
The fertilizer divisions had a decrease of $.5 million in gross profit,
with wholesale fertilizer down and retail farm centers up.
Gross profit for PMG decreased $1.4 million from the prior year. The
processing division had the largest decrease of $3.9 million or 14.7%, the
manufacturing division had a $1.8 million or 30.9% increase and the
ventures division also had increased gross profit of $.7 million or 10.8%.
When excluding the 1996 gross profit related to the businesses no longer
operated (as described previously), PMG showed an increase of $1.5 million or
4%. Gross profit for the Retail Group decreased 5.6%.
Operating, administrative and general expenses for 1997 totaled $131.8
million, a $1.8 million or 1.4% decrease from 1996. This reduction includes
approximately $2.6 million for businesses no longer operated and a return to a
more normal level of expense for bad debts and grain contract nonperformance
than in the past two years. The Retail Group took a pretax, non-cash charge of
$1.1 million to write down store assets to their fair value. There was no
comparable charge in 1996. See also Note 5 to the Audited Financial
Statements.
Interest expense for 1997 was $8.5 million, a $5.2 million or 38%
decrease from 1996. The average daily borrowing amount decreased 57.0% from
1996 and the average interest rate decreased slightly. Borrowings were
unusually high in 1996 due to the extraordinarily high commodity prices from
the third quarter of 1995 until their decrease in mid-1996.
Income before income taxes of $6.3 million represented a decrease of $5.6
million or 47.4% from the 1996 pretax income of $11.9 million. Income tax
expenses was $2.2 million, a $3.3 million or 60.2% decrease from 1996. The
decrease is attributable to the significant decrease in pretax income in 1997
and a decrease in the effective tax rate from 46.1% to 34.9%. The 1996 tax
expense includes a non-recurring charge of $0.8 million (6.8%) to establish
deferred income taxes on the assets and liabilities of the former partnership.
See Note 1 to the Consolidated Financial Statements. In addition, state and
local taxes decreased in 1997.
Net income decreased 36.4% to $4.1 million from $6.4 million. Earnings
per share decreased 34.2% from $0.76 per share in 1996 to $0.50 per share in
1997.
Comparison of 1996 with 1995
Sales and revenue for 1996 totaled $1.2 billion, an increase of $57.2
million or 5.2% from 1995. The Agriculture Group accounted for $41.3 million
of the increase. Grain shipment volume was down approximately 19% from 1995.
This was more than offset by a 31% increase in average price per bushel. The
majority of the volume decrease resulted from a poor 1996 wheat harvest and a
poor 1996 corn harvest in some of the primary growing areas served by the
Company. The increase in the average selling price is reflective of
significant increases in market prices of commodities in the fall of 1995
through late spring of 1996. Wholesale fertilizer experienced a 1%
increase in sales with a slight volume increase of 3% and a decrease of 2% in
average prices, while the retail farm center sales were unchanged from 1995.
The Processing and Manufacturing Group experienced sales increases of
8.6% with all major divisions contributing to the Group's improvement. The
processing division recorded an increase in sales of $7.8 million or
12%, the manufacturing division had increased sales of $0.5 million or 2.6% and
the ventures division increased sales $0.4 million or 2.9%.
The Retail Group experienced a 4.7% increase in sales, led by increases
in each of the three Toledo, Ohio area stores. Store closings by some
competitors, as well as significant refurbishing of one of the Toledo stores,
contributed to this increase. Increased competition is expected in this region
in 1997.
Included in other income in 1996 are proceeds of approximately $1 million
from the sale of the sorbents business, a small component of the processing
division. Overall, other income decreased from 1995 when sales of excess real
estate added approximately $2.5 million to operating income.
Gross profit for 1996 totaled $159 million, an increase of $5.7 million or
3.7% from 1995. Significant increases in gross profit were experienced in the
Processing and Manufacturing Group, with a $3.7 million or 10.7% increase,
and the Retail Group, with a $2.4 million or 5% increase. Gross profit in the
Agriculture Group was unchanged. Gross profit, as a percent of total sales and
revenue, declined slightly from 14% in 1995 to 13.8% in 1996.
Operating, administrative and general expenses for 1996 totaled $133.6
million, a $4.4 million or 3.4% increase over 1995. Two million dollars of
this increase was due to additional provision for losses on accounts and notes
receivable relating primarily to nonperformance on grain contracts and related
nonpayment of accounts receivable.
Interest expense for 1996 was $13.7 million, a $0.3 million or 2.3%
decrease from 1995. The average daily borrowing amount was unchanged from 1995
but the average interest rate decreased 0.45%. Borrowings for both 1995 and
1996 were unusually high due to the significant rise in commodity prices in the
third quarter of 1995 until their decrease in mid-1996. The Company's cost to
carry higher value grain inventory and resulting margin requirements for
its commodity hedge portfolio, required additional funding in the first half of
the year. These short-term borrowings were reduced to zero by year end.
Income before income taxes of $11.9 million represented an improvement of
$1.6 million or 15% from the 1995 pretax income of $10.3 million. Net income
(after considering the 1995 pro forma tax adjustment) also improved 2.1% to
$6.4 million from $6.3 million. The 1996 net income includes a non-recurring
charge of $0.8 million to establish deferred income taxes on the assets and
liabilities of the Partnership. Earnings per share (also after considering the
1995 pro forma tax adjustment) increased 2.7% from $0.74 per share in 1995 to
$0.76 per share in 1996.
Liquidity and Capital Resources
The Company's operations used cash of $15 million in 1997 as compared to
providing $159 million in cash in 1996. The significant amount of cash
provided in 1996 related to the liquidation of grain inventories in response to
market conditions. Cash used in 1997 is reflected in the ending inventory
positions.
The Company has significant short-term lines of credit available to
finance working capital, primarily inventories and accounts receivable. Lines
of credit available on December 31, 1997 were $250 million. The Company had
drawn $15.6 million on its short-term lines of credit in 1997, with no short-
term lines drawn in 1996. Typically, the Company's highest borrowing occurs in
the spring due to seasonal inventory requirements in several of the Company's
businesses, credit sales in the lawn products and agricultural fertilizer
businesses and a customary reduction in grain payables due to customer cash
needs and market strategies.
The Company utilizes interest rate contracts to manage interest rate risk
on both its long and short term debt and lease commitments. As of December 31,
1997, the Company had swaps with a total notional amount of $29.4 million which
convert variable rates to fixed rates on long and short-term borrowings. The
Company also held treasury locks with a total notional amount of $24.9 million
to hedge the interest component of firm commitment railcar lease transactions
that are projected to close in 1998.
Cash dividends of $1 million were paid in 1997 ($.12 per share). The
Company made income tax payments of $4.1 million in 1997 The Company also
purchased 470,000 of its common shares on the open market. Shares in the
Company's treasury were purchased at an average of $9 per share.
During 1997, the Company invested approximately $15.4 million in capital
additions and improvements, including $4.2 million to upgrade retail stores and
$3.4 million to purchase previously leased agricultural facilities.
Approximately $17 million is budgeted for capital spending in 1998 including $6
million for business expansion and growth, $2.5 million for additional rail
cars, $.8 million for additional storage capacity and $1.4 million for
upgrades and improvements to production and handling facilities. These
expenditures are expected to be funded by cash generated from operations or
available lines of credit.
Certain of the Company's long-term debt is secured by first mortgages on
various facilities. In addition, some of the long-term borrowings include
provisions that impose minimum levels of working capital and equity,
limitations on additional debt and requires that the Company be substantially
hedged in its grain transactions.
The Company's liquidity is enhanced by the fact that grain inventories
are readily marketable and the adequate lines of credit that it has available.
In the opinion of management, the Company's liquidity is adequate to meet
short-term and long-term needs.
Impact of Year 2000
Some of the Company's older computer programs were written using two
digits rather than four to define the applicable year. As a result, those
computer programs may have time-sensitive software that recognize a date using
"00" as the year 1900 rather than the year 2000. This could cause a system
failure or miscalculations causing disruption of operations.
The Company has substantially completed an assessment and identified
software that will have to be modified or replaced so that its computer systems
will function properly with respect to dates in the year 2000 and thereafter.
The total Year 2000 project cost, excluding modification or potential
replacement of cash register systems in the Retail Group, is estimated at
approximately $1.7 million, which includes $.9 million for the purchase of new
software that will be capitalized and $.8 million that will be expensed as
incurred. The Company is still developing its plans for the cash register
systems in the Retail Group. The total cost to make these systems Year 2000
compliant is currently being determined.
Initial installation of new software and programming modifications are
anticipated to be substantially complete in early 1999, which will allow for
testing and revisions prior to any anticipated impact on operating systems.
The Company believes that with modifications to existing software and
conversions to new software, the Year 2000 Issue will not pose significant
operational problems for its computer systems. However, if such modifications
and conversions are not made, or are not completed timely, the Year 2000 Issue
could have an impact on the operations of the Company.
The costs of the project and the date on which the Company believes it
will complete the Year 2000 modifications are based on management's best
estimates, which were derived utilizing numerous assumptions of future events,
including the continued availability of certain resources and other factors.
However, there can be no guarantee that these estimates will be achieved and
actual results could differ materially from those anticipated. Specific
factors that might cause such material differences include, but are not limited
to, the availability and cost of personnel trained in this area, the ability
to locate and correct all relevant computer codes and similar uncertainties.
Forward Looking Statements
The preceding Letter to Shareholders, Business Review and Management's
Discussion and Analysis contain various "forward-looking statements" that
reflect the Company's current views with respect to future events and
financial performance. These forward-looking statements are subject to certain
risks and uncertainties, including but not limited to those identified below,
which could cause actual results to differ materially from historical results
or those anticipated. The words "believe," "expect," "anticipate" and similar
expressions identify forward-looking statements. Readers are cautioned not to
place undue reliance on these forward-looking statements, which speak only as
of their dates. The Company undertakes no obligation to publicly update or
revise any forward-looking statements, whether as a result of new information,
future events or otherwise. The following factors could cause actual results
to differ materially from historical results or those anticipated; weather,
supply and demand of commodities including grains, fertilizer and other basic
raw materials, market prices for grains and the potential for increased margin
requirements, regulatory agency review of grain contracts, competition,
economic conditions, risks associated with acquisitions, interest rates and
income taxes.
The Andersons, Inc.
Notes to Consolidated Financial Statements
December 31, 1997
1. Basis of Financial Presentation
On January 2, 1996, The Andersons, an Ohio limited partnership (the
"Partnership") merged with and into The Andersons Management Corp. (the
"Company") and the partnership was dissolved. Concurrent with the merger, the
Company changed its name to The Andersons, Inc. Prior to the merger, the
Company was the sole general partner of the Partnership, and the Company and
the Partnership shared common ownership.
The merger was accounted for as a reorganization of entities under common
control similar to a pooling of interests. The Company's financial statements
have been restated to include the accounts and operations of the Partnership
for all periods prior to the merger. The Company, in previous years, had
presented financial statements that combined the accounts and results of
operations of the Company and the Partnership. All material intercompany
accounts and transactions had been eliminated in the combined presentation and,
consequently, the restatement to reflect the merger was not material to the
historical presentation.
The Partnership's net income was includable in the federal income tax returns
of its partners, and therefore, the Partnership did not pay federal income
taxes. The Partnership's operations were included in the Company's U.S.
federal income tax return effective January 2, 1996, and therefore, a net
deferred tax liability and corresponding expense of $0.8 million ($.10 per
share) was recorded in the first quarter of 1996. The income statement for
1995 was restated to present pro forma income taxes and pro forma earnings per
share as if the change in the corporate structure had been effective on January
1, 1995.
Pro forma net income per share is calculated on the actual shares that were
outstanding at the date of the merger. In the merger transaction, 8.1 million
shares were issued to the partners of the Partnership and the remainder (.3
million shares) to shareholders of the Company and employees who held
convertible bonds of the Partnership.
2. Significant Accounting Policies
Estimates and Assumptions
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
Cash and cash equivalents include cash and all highly liquid debt instruments
purchased with an initial maturity of three months or less. The carrying value
of these assets approximate their fair values.
Securities
Management determines the appropriate classification of debt securities at the
time of purchase and reevaluates such designation as of each balance sheet
date. Debt securities are classified as held-to-maturity when there is positive
intent and ability to hold the securities to maturity. Held-to-maturity
securities are stated at amortized cost.
The fair market value of held-to-maturity securities, consisting primarily of
time deposits and U.S. Treasury securities, approximated their amortized cost
of $4.7 million and $22.9 million at December 31, 1997 and 1996, respectively.
The held-to-maturity securities are included in cash and cash equivalents and
margin deposits in the consolidated balance sheets and mature within one year.
Inventories and Inventory Commitments
Grain inventories in the Company's balance sheet are hedged to the extent
practicable and are valued on the basis of replacement market prices prevailing
at the end of the year. Such inventories are adjusted for the amount of gain
or loss (also based on year-end market price quotations) on open commodity
contracts at the end of the year. These contracts require performance in future
periods. Contracts to purchase grain from producers generally relate to the
current or future crop years for delivery periods quoted by regulated commodity
exchanges. Contracts for the sale of grain to processors or other consumers
generally do not extend beyond one year. The terms of contracts for the
purchase and sale of grain are consistent with industry standards.
All other inventories are stated at the lower of cost or market. Cost is
determined by the average cost method.
Commodity and Interest Rate Contracts
For the purpose of hedging its market price risk exposure on grain owned and
related forward grain purchase and sale contracts, the Company holds regulated
commodity contracts in the form of futures and options contracts for corn,
soybeans and wheat. The Company accounts for all commodity contracts using a
daily mark-to-the-market method; the same method it uses to value grain
inventory and forward purchase and sale contracts. Company policy limits the
Company's unhedged grain position.
Gains and losses in the value of commodity contracts (whether due to changes in
commodity prices or due to sale, maturity, or extinguishment of the commodity
contract) and grain inventories and related forward grain contracts are
included in Grain Sales and Merchandising Revenues in the statement of income.
The Company also periodically enters into interest rate contracts to manage
interest rate risk on borrowing or financing activities. Income or expense
associated with interest rate swap contracts is recognized on the accrual
basis over the life of the agreement as a component of interest expense. The
Company expenses the cost of interest rate caps at the date of purchase. Gains
or losses upon settlement of treasury rate locks hedging the interest
component of firm commitment lease transactions are recognized over the life of
the ensuing lease transaction. All interest rate contracts are entered into
for hedging purposes. The fair market value of interest rate contracts
is not recognized in the balance sheet.
Property, Plant and Equipment
Land, buildings and equipment are carried at cost. Depreciation is provided
over the estimated useful lives of the individual assets principally by the
straight-line method.
Accounts Payable for Grain
The liability for grain purchases on which price has not been established
(delayed price) has been computed on the basis of replacement market at the end
of the year, adjusted for the applicable premium or discount.
Revenue Recognition
Sales of grain and other products are recognized at the time of shipment.
Revenues from merchandising activities are recognized as open contracts are
marked to market or as services are provided.
Income Taxes
Deferred income taxes are determined based on temporary differences between
financial reporting and tax bases of assets and liabilities and are measured
using the tax rates and laws that will be in effect when the differences are
expected to reverse.
Advertising
Advertising costs are expensed as incurred. Advertising expense of $3.2
million, $3.1 million and $3.6 million is included in operating, administrative
and general expense in 1997, 1996 and 1995, respectively.
Earnings per Share
The Company adopted Financial Accounting Standards Board Statement No. 128,
"Earnings per Share" in 1997. Under Statement No. 128, the Company is
required to calculate basic and diluted earnings per share. Basic earnings per
share is equal to net income divided by weighted average shares outstanding.
Diluted earnings per share is equal to basic earnings per share plus the
incremental share effect of dilutive options issued to officers, directors and
employees.
New Accounting Standard
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement No. 131 "Disclosures about Segments of an Enterprise and Related
Information", which is effective for years beginning after December 15, 1997.
The new rules change the manner in which operating segments are defined and
reported externally to be consistent with the basis on which they are reported
and evaluated internally. The impact that this statement will have on the
Company has not been fully determined.
3. Inventories
Major classes of inventories are as follows:
December 31
(in thousands) 1997 1996
Grain $ 113,838 $ 70,762
Agricultural fertilizer and supplies 18,908 21,897
Merchandise 27,674 29,527
Lawn and corn cob products 20,142 17,633
Other 10,905 10,478
$ 191,467 $150,297
4. Property, Plant and Equipment
The components of property, plant and equipment are as follows:
December 31
(in thousands) 1997 1996
Land $ 11,763 $ 11,261
Land improvements and leasehold
improvements 24,594 24,431
Buildings and storage facilities 85,377 80,669
Machinery and equipment 104,590 99,871
Construction in progress 2,109 1,795
228,433 218,027
Less allowances for depreciation and
amortization 142,636 136,362
$ 85,797 $ 81,665
5. Asset Impairment Charge
Based upon an assessment of historical and projected operating results, the
Company determined in 1997 that the carrying value of certain retail store
assets were impaired under the criteria defined in FASB Statement No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed Of". As a result, the Company recorded a pretax impairment
charge of $1.1 million ($.7 million after tax or $.09 per share) to write down
the carrying value of these assets to their estimated fair value. Fair value
was estimated through market price comparisons for similar assets.
6. Banking and Credit Arrangements
The Company has available lines of credit for unsecured short-term debt with
banks aggregating $250 million. The credit arrangements, the amounts of which
are adjusted from time to time to meet the Company's needs, do not have
termination dates but are reviewed at least annually for renewal. The terms of
certain of the lines of credit provide for annual commitment fees.
The following information relates to borrowings under short-term lines of
credit during the year indicated.
(in thousands, except for 1997 1996 1995
interest rate)
Maximum borrowed $110,500 $207,800 $195,500
Average daily amount borrowed (total
of daily borrowings divided by
number of days in period) 51,237 119,187 118,382
Average interest rate (computed by
dividing interest expense by
average daily amount outstanding) 5.98% 6.10% 6.55%
7. Long-Term Debt
Long-term debt consists of the following:
December 31
(in thousands) 1997 1996
Note payable, 7.84%, payable $398
thousand quarterly, due 2004 $13,304 $14,250
Note payable under revolving credit line 20,000 16,300
Notes payable, variable rate (6.8% at
December 31, 1997), payable $336
thousand quarterly, due 2004 9,082 9,418
Other notes payable 1,120 1,036
Industrial development revenue bonds:
6.5%, sinking fund $1 million payable 2,000 2,900
annually, due 1999
Variable rate (5.7% at December 31,
1997), payable $882 thousand annually 5,470 6,351
through 2004
Variable rate (4.2% at December 31,
1997), due 2025 3,100 3,100
Debenture bonds, 6.5% to 8.7%, due
1998 through 2007 19,556 21,030
Other bonds, 4% to 9.6% 483 543
74,115 74,928
Less current maturities 8,406 6,360
$65,709 $68,568
The Company has a $40 million revolving line of credit with a bank which bears
interest based on the LIBOR rate (6.21% at December 31, 1997). Borrowings
under this agreement totaled $20 million at December 31, 1997. The revolving
credit line expires on July 1, 1999.
The variable rate notes payable, the notes payable in quarterly installments,
and the industrial development revenue bonds are collateralized by first
mortgages on certain facilities and related property with a book value of
approximately $30 million.
The various underlying loan agreements, including the Company's revolving
credit line, contain certain provisions which require the Company to, among
other things, maintain minimum working capital of $32 million and net equity
(as defined) of $43 million, limit the addition of new long-term debt, limit
its unhedged grain position to 2 million bushels, and restrict the amount of
dividends. The Company was in compliance with these covenants at December 31,
1997.
The aggregate annual maturities of long-term debt, including sinking fund
requirements, are as follows: 1998--$8 million; 1999--$26 million; 2000--$4
million; 2001--$7 million and 2002--$11 million.
Interest paid (including short-term lines of credit) amounted to $9 million,
$15 million and $13 million in 1997, 1996 and 1995, respectively.
The Company periodically utilizes interest rate contracts to manage interest
rate risk on short-term borrowings by converting variable interest rates to
short-term fixed rates consistent with projected borrowing needs. At December
31, 1997, the Company was participating in two short-term interest rate swap
agreements, with a total notional amount of $20 million. The interest rate
swaps expire in January 1998 and convert variable interest rates to fixed rates
of 5.92% to 6.04%. The Company also has purchased two interest rate caps, each
with notional amounts of $10 million. The caps expire on April 1, 1998 and
cap interest at 6.25%.
The Company entered into a long-term interest rate swap in December 1996 to
convert its variable rate $9.4 million note payable to a fixed rate of 6.65%.
This swap expires in October 2002. The notional amount of this swap equals the
outstanding balance of the long-term note and amortizes in the same manner as
the note principal. The Company also has entered into long-term treasury locks
with a total notional amount of $24.9 million. These instruments hedge the
interest component on firm commitment lease transactions that are projected to
close in 1998. The effect of long-term and short-term interest rate contracts
on interest expense was not significant in 1997, 1996 and 1995.
8. Income Taxes
Income tax consists of the following:
Year ended December 31
Pro Forma
(Unaudited)
(in thousands) 1997 1996 1995
Current:
Federal $1,728 $2,268 $3,088
State and local (25) 451 791
1,703 2,719 3,879
Deferred:
Federal 393 2,134 138
State and local 85 632 35
478 2,766 173
Total:
Federal 2,121 4,402 3,226
State and local 60 1,083 826
$2,181 $5,485 $4,052
A reconciliation from the statutory U.S. federal tax rate of 35% to the
effective tax rate is as follows:
Pro
Forma
(Unaudited)
1997 1996 1995
Statutory U.S. Federal tax rate 35.0% 35.0% 35.0%
Increase (decrease) in rate
resulting from:
State and local income taxes net of
related federal taxes 0.6% 4.4% 4.4%
Net basis differences of
partnership -- 6.8% --
Other (net) (0.7)% (0.1)% (0.2)%
Effective tax rate 34.9% 46.1% 39.2%
Income taxes paid in 1997, 1996 and 1995 were $4.1 million, $131 thousand, and
$340 thousand.
Significant components of the Company's deferred tax liabilities and assets are
as follows:
December 31
(in thousands)
1997 1996
Deferred tax liabilities:
Tax depreciation in excess of book
depreciation $ (7,555) (7,602)
Prepaid employee benefits (1,682) (1,170)
Deferred income (692) (695)
Other (463) (216)
(10,392) (9,683)
Deferred tax assets:
Employee benefits accrual 2,919 2,534
Allowance for doubtful accounts and notes
receivable 1,138 1,249
Inventory reserve 1,086 1,042
Investments 857 866
Deferred income 217 309
Other 190 176
6,407 6,176
Net deferred tax liability $ (3,985) $(3,507)
9. Stock Compensation Plans
The Company has two stock-based compensation plans that are described below.
The Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB 25), and related
Interpretations in accounting for its employee stock options under these plans
because, as discussed below, the alternative fair value accounting provided for
under FASB Statement No. 123, "Accounting for Stock-Based Compensation,"
("Statement 123") requires use of option valuation models that were not
developed for use in valuing employee stock options. Under APB 25, because the
exercise price of the Company's employee stock options equaled the market price
of the underlying stock on the date of grant, no compensation expense was
recognized for either of its plans.
The Long-Term Performance Compensation Plan (the "LT Plan") authorizes the
Board of Directors to grant options to employees and outside directors for up
to 900,000 common shares of the Company. Options granted under the LT Plan
have a maximum term of 10 years. Options granted to outside directors in 1997
and 1996 have a fixed term of five years and vest after one year. Options
granted to management personnel under the LT Plan in 1997 and 1996 have a five
year term and vest 40% immediately, 30% after one year and the remaining 30%
after two years. In addition, certain Company executives have elected to
receive a portion of their salary in stock options issued under the LT Plan.
These options vest immediately and have a ten year term. There were 50,756
options issued in lieu of salary in 1997.
Pro forma information regarding net income and earnings per share is required
by Statement 123, and also requires that the information be determined as if
the Company has accounted for its employee stock options granted under the
fair value method of that Statement. The fair value of the each option grant
is estimated at the date of grant using a Black-Scholes option pricing model
with the following weighted average assumptions used for the 1997 and 1996
grants, respectively: risk free interest rate of 6.22% and 5.55%; dividend
yield of 1.33% and 1.30%; volatility factor of the expected market price of the
Company's common shares of .272 and .389; and an expected life for the options
of six and one half years and five years.
The Company's Employee Share Purchase Plan (the "ES Plan"), that allows
employees to purchase common shares through payroll withholdings, also contains
an option component. The share purchase price is the lower of the market price
at the beginning or end of the year. The Company records a liability for
withholdings not yet applied towards the purchase of common stock. Assumptions
for the ES Plan used for grants in 1997 and 1996, respectively, were as
follows: risk free interest rate of 6.08% and 5.07%; dividend yield of 1.35%
and 1.30%, volatility factor of the expected market price of the Company's
common shares of .272 and .389; and an expected life for the option of one
year.
The Black-Scholes option valuation model was developed for in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected share price volatility.
Because the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The Company's pro
forma information follows (in thousands except for earnings per share
information):
1997 1996
Pro forma net income $3,700 $6,154
Pro forma earnings per share:
Basic $.45 $.73
Diluted $.45 $.73
A summary of the Company's stock option activity, and related information for
the years ended December 31 follows (in thousands, except for prices):
Long Term Performance Compensation Plan
1997 1996
Weighted Weighted
Average Average
Shares Exercise Price Shares Exercise Price
Outstanding at beginning of year 137 $8.60 -- --
Granted / Subscribed 170 9.05 137 $8.60
Exercised -- -- -- --
Expired (2) 8.60 -- --
Outstanding at end of year 305 $8.85 137 $8.60
Options available for
grant at end of year 595 363
Options price range at
end of year $8.60 to $9.125 $8.60
Weighted average remaining
contractual life 4.51 4.15
Weighted average fair value
of options granted during the
year $3.15 $3.27
Options exercisable at end of 193 52
year
Employee Share Purchase Plan
1997 1996
Weighted Weighted
Average Average
Shares Exercise Price Shares Exercise Price
Outstanding at beginning of
year 49 $8.60 -- --
Granted / Subscribed 52 8.875 59 $8.60
Exercised (49) 8.60 -- --
Forfeited (5) 8.875 (10) 8.60
Outstanding at end of year 47 $8.875 49 $8.60
Options available for
grant at end of year 204 251
Options price range at $8.875 $8.60
end of year
Weighted average fair value
of options granted during $1.13 $1.37
the year
Options exercisable at end 47 49
of year
10. Leases and Related Commitments
The Company leases certain equipment and real property under operating leases,
including railcar leases and subleases. Net rental expense under operating
leases, relating primarily to buildings and equipment used by the Company's
operations, was as follows:
(in thousands)
1997 1996 1995
Total rental expense $13,202 $11,934 $11,242
Less rental income from subleases 10,470 7,924 6,313
Net rental expense $ 2,732 $ 4,010 $ 4,929
At December 31, 1997, the company had commitments for railcar lease and
sublease transactions that are scheduled to close in 1998. Future minimum
rentals and sublease income that will result from these transactions have not
been reflected in the table following, however, the Company anticipates that
these leases will result in sublease income in excess of future minimum rentals
over the ensuing lease terms.
Future minimum rentals for all noncancelable operating leases and future rental
income from subleases are as follows:
(in thousands) Future Future Sublease
Minimum Income
Rentals
1998 $10,820 $ 7,013
1999 6,899 4,690
2000 4,849 2,606
2001 4,172 2,035
2002 3,575 1,635
Future years 9,894 5,585
$40,209 $23,564
11. Employee Benefit Plans
The Company sponsors several employee benefit programs including the following:
Defined Benefit Pension Plan and Supplemental Retirement Plan, Retirement
Savings Investment Plan, Cash Profit Sharing Plan, Management Performance
Program and health insurance benefits.
Substantially all full-time employees are covered by the Company's Defined
Benefit Pension Plan (the "DBPP"). The benefits are based on the employee's
highest five consecutive years of compensation during their last ten years of
service. The Company's policy is to pay into trusteed funds each year an
amount equal to the annual pension expense calculated under the Entry Age
Normal method. In addition, the Company has a Supplemental Retirement Plan
(the "SERP") which is a non-qualified deferred compensation plan designed to
cover all DBPP participants whose compensation exceeds the Internal Revenue
Code limitation. SERP benefits are calculated similarly to the DBPP and are
based on compensation in excess of the Internal Revenue Code limitation.
The following table sets forth the plans' funded status and amounts recognized
in the Company's balance sheets as of December 31.
December 31
(in thousands) 1997 1996
DBPP SERP All Plans
Actuarial present value of benefit
obligation:
Vested benefits $(9,313) $ (498) $(8,456)
Non-vested benefits (553) -- (442)
Accumulated benefits obligation (9,866) (498) (8,898)
Impact of future salary increases (5,534) (541) (5,184)
Projected benefit obligation for
service rendered to date (15,400) (1,039) (14,082)
Plan assets at fair value, primarily
mutual funds 16,800 -- 13,017
Plan assets in excess of or (less
than) projected benefit obligation 1,400 (1,039) (1,065)
Unrecognized net asset at adoption,
net of amortization (42) -- (92)
Unrecognized net (gain) loss (564) 510 497
Prior service cost -- 222 254
Adjustment required to recognize
minimum liability -- (191) --
Prepaid (liability) recognized in
the balance sheet $ 794 $ (498) $ (406)
Net periodic pension cost includes the following components:
Year ended December 31
(in thousands)
1997 1996 1995
Service cost - benefits earned
during the period $1,536 $1,503 $1,234
Interest cost on projected
benefit obligation 1,000 796 681
Return on plan assets (2,446) (1,394) (2,018)
Net amortization and deferral 1,363 547 1,425
Net periodic pension cost $1,453 $1,452 $1,322
The weighted average discount rate and rate of increase in future compensation
levels used in determining the actuarial present value of the projected benefit
obligation was 7.5% and 4%, respectively. The weighted average long-term rate
of return on plan assets used in determining the expected return on plan assets
included in net periodic pension cost was 8% for all years presented.
Substantially all of the plan assets are invested in a family of mutual funds.
Under the Retirement Savings Investment Plan (the "RSIP") (401k) eligible
participating employees may elect to contribute specified amounts up to 15% of
their gross pay on a tax-deferred basis, subject to certain limitations, to a
trust for investment in mutual funds. The Company contributes an amount equal
to 50% of the participant's contributions, but not in excess of 3% of the
participant's annual gross pay. Participants are fully vested in their
contributions to the RSIP. Participants vest ratably in the Company's matching
contributions over five years. The matching contributions to the RSIP amounted
to $1.1 million, $1 million, and $0.9 million in 1997, 1996 and 1995,
respectively.
Substantially all full-time employees are included in the Cash Profit Sharing
Plan. The Plan provides for participants to receive certain percentages of
their pay as various threshold levels of return on capital of the Company are
achieved. The Company also has a Management Performance Program for certain
levels of management. Participants in the Management Performance Program are
not eligible to participate in the Cash Profit Sharing Plan. The expense for
profit sharing/management performance programs was $1.1 million, $2.2 million
and $1.6 million for 1997, 1996 and 1995, respectively.
The Company currently provides certain health insurance benefits to its
employees, including retired employees. The Company has reserved the right in
most circumstances to modify the benefits provided and in recent years has in
fact made changes. The Company has elected to recognize the accrued benefits
earned by employees as of January 1, 1993 (transition obligation)
prospectively, which means this cost will be recognized as a component of the
net periodic postretirement benefit cost over a period of approximately 20
years.
The Company's postretirement benefits are not funded. The status of the plan
as of December 31 is as follows:
(in thousands) 1997 1996
Accumulated postretirement benefit obligation:
Retirees $ 5,531 $ 5,035
Fully eligible active plan participants 693 823
Other active plan participants 4,070 3,737
10,294 9,595
Unrecognized net transition obligation (6,309) (6,730)
Unrecognized net gain 180 398
Accrued postretirement benefit cost $ 4,165 $ 3,263
Net periodic postretirement benefit cost includes the following components:
Year ended December 31
(in thousands) 1997 1996 1995
Service cost $ 302 $ 272 $ 247
Interest cost 711 666 679
Net amortization 421 421 421
Net periodic postretirement benefit costs $ 1,434 $ 1,359 $ 1,347
The weighted average discount rate used in determining the accumulated
postretirement benefit obligation was 7.5%. The weighted average discount rate
used in determining the postretirement benefit cost was 7.5% for all years
presented.
The assumed health care cost trend rate used to measure the expected cost of
benefits covered by the plan was 5% in 1997 and remaining at that level
thereafter. A 1% increase in the assumed health care cost trend rate would
increase the annual postretirement benefit cost by approximately $200
thousand and the accumulated postretirement benefit obligation as of December
31, 1997 by approximately $1.7 million.
To partially fund self-insured health care and other employee benefits, the
Company makes payments to a trust. Assets of the trust amounted to $2.6
million and $2.3 million at December 31, 1997 and 1996, respectively, and such
amounts are included in prepaid expenses.
The following table reconciles the pension and postretirement assets and
liabilities to their appropriate line items in the consolidated balance sheet:
December 31
1997 1996
DBPP asset (liability) $ 794 $ (241)
SERP (liability) (498) (165)
Pension asset (liability) 296 (406)
Postretirement liability (4,165) (3,263)
Net pension and postretirement liability $(3,869) $ (3,669)
As displayed in the Consolidated Balance
Sheets:
Accrued expenses $(1,070) $ (865)
Pension and postretirement liability (2,799) (2,804)
$(3,869) $ (3,669)
12. Fair Values of Financial Instruments
The fair values of the Company's cash equivalents, margin deposits and long
and short-term debt, approximate their carrying values since the instruments
provide for short terms to maturity and/or variable interest rates based on
market indexes. The Company's investments in affiliates are accounted for on
the equity method which approximates fair value.
The Company believes the fair value of its notes receivable, long-term notes
payable and debentures, some of which bear fixed rates and terms of five or ten
years, approximate their carrying values, based upon interest rates offered by
the Company on similar notes receivable and bonds and rates currently
available to the Company. The fair value of off-balance sheet interest rate
contracts, as described in Note 7, which are not recognized in the balance
sheet, is estimated based on quoted market termination values. Fair values of
these contracts amount to a liability of $618 thousand and an asset of $98
thousand at December 31, 1997 and 1996, respectively. The fair value of these
interest rate contracts are substantially offset by unrealized appreciation and
depreciation in the hedged items.
13. Business Segments
The Company operates three business segments: Agriculture Group, Processing
and Manufacturing Group and Retail Group. The Agriculture Group includes grain
merchandising, operation of terminal grain elevator facilities, manufacture of
liquid fertilizer products and distribution of agricultural products, primarily
fertilizer. The Processing and Manufacturing Group includes production and
distribution of lawn and corn cob products, rail car leasing and repair
and the marketing of the Company's excess real estate as well as other, smaller
businesses. The Retail Group includes operation of retail stores and a
distribution center.
The segment information includes the allocation of expenses shared by one or
more segments. Although management believes such allocations are reasonable,
the operating information does not necessarily reflect how such data might
appear if the segments were operated as separate businesses.
Year ended December 31
(in thousands) 1997 1996 1995
Sales and revenues:
Agriculture Group:
Sales to unaffiliated customers $697,845 $841,262 $796,754
Intersegment sales 3,071 2,314 6,630
Merchandising revenues and 27,067 25,472 28,090
other income 727,983 869,048 831,474
Processing and Manufacturing
Group:
Sales to unaffiliated customers 100,486 108,997 100,402
Intersegment sales 940 950 929
Merchandising revenues and
other income 2,713 2,615 3,296
104,139 112,562 104,627
Retail Group:
Sales to unaffiliated customers 169,939 175,987 168,051
Merchandising revenues and
other income 207 146 282
170,146 176,133 168,333
Other income 588 477 855
Eliminations--intersegment sales (4,011) (3,264) (7,559)
Total sales and revenues $998,845 $1,154,956 $1,097,730
Operating profit:
Agriculture Group $ 8,615 $ 15,046 $ 16,920
Processing and Manufacturing
Group 7,519 7,733 6,719
Retail Group (including asset
impairment) 1,605 6,680 4,392
Total operating profit 17,739 29,459 28,031
Other income 275 371 664
Interest expense (8,494) (13,703) (14,019)
General expenses (3,265) (4,236) (4,351)
Income before income taxes $ 6,255 $ 11,891 $ 10,325
Identifiable assets:
Agriculture Group $232,769 $ 190,932 $ 321,045
Processing and Manufacturing
Group 59,500 56,196 62,313
Retail Group 59,508 61,799 61,296
General 16,467 37,664 10,864
Total assets $368,244 $ 346,591 $ 455,518
Depreciation and amortization
expense:
Agriculture Group $ 4,728 $ 4,336 $ 4,186
Processing and Manufacturing
Group 1,944 2,061 1,960
Retail Group 2,823 2,870 2,771
General 570 463 401
Total depreciation and
amortization expense $ 10,065 $ 9,730 $ 9,318
Capital expenditures:
Agriculture Group $ 8,382 $ 4,359 $ 10,072
Processing and Manufacturing
Group 2,344 2,029 2,536
Retail Group 4,316 3,042 2,749
General 385 690 633
Total expenditures $ 15,427 $ 10,120 $ 15,990
Intersegment sales are made at prices comparable to normal, unaffiliated
customer sales. Operating profit is sales and merchandising revenues plus
interest and other income attributable to the operating area less operating
expenses, excluding interest and general expenses. Identifiable assets
by segment include accounts receivable, inventories, advances to suppliers,
property, plant and equipment and other assets that are directly identified
with those operations. General assets consist of cash, investments, land and
buildings and equipment associated with administration and services, and other
assets not directly identified with segment operations. Grain sales for export
to foreign markets amounted to approximately $177 million, $193 million and
$194 million in 1997, 1996 and 1995, respectively.
Board of Directors
Richard P. Anderson (3) Thomas H. Anderson (3)
Chairman & Chief Executive Officer Chairman Emeritus
The Andersons, Inc. The Andersons, Inc.
Donald E. Anderson (3) Michael J. Anderson (3)
Director of Science, retired President & Chief Operating Officer
The Andersons, Inc. The Andersons, Inc.
Richard M. Anderson (3) John F. Barrett(2)/(3)
Vice President & General Manager President & Chief Executive Officer
Processing Division The Western & Southern Life
The Andersons, Inc. Insurance Co.
Paul M. Kraus (3) Donald L. Mennel (3)
Attorney President & Treasurer
Marshall & Melhorn The Mennel Milling Company
Donald M. Mennel (1)/(3) David L. Nichols (1)/(2)/(3)
Attorney, Retired Chairman of the Chairman & Chief Executive Officer
Board & Chief Executive Officer Mercantile Stores Company, Inc.
The Mennel Milling Company
Dr. Sidney A. Ribeau (1)/(3) Charles A. Sullivan(1)/(2)/(3)
President Chairman & Chief Executive Officer
Bowling Green State University Interstate Bakeries Corp.
(1) Audit Committee
(2) Compensation Committee
(3) Nominating Committee
Independent Auditors
Ernst & Young LLP, Toledo, Ohio
Nasdaq Symbol
The Andersons, Inc. common shares are traded on
the Nasdaq National Market tier of The Nasdaq
Stock Market under the symbol: ANDE
Shareholders
As of March 3, 1998 there were 7,986,063 shares
of common stock outstanding. At that date, there
were 340 shareholders of record and approximately
2,500 shareholders for whom securities firms acted
as nominees.
Corporate Officers
Thomas H. Anderson Richard P. Anderson
Chairman Emeritus Chairman & Chief Executive Officer
Michael J. Anderson Christopher J. Anderson
President & Chief Operating Officer President, Processing & Manufacturing
Group
Daniel T. Anderson Joseph L. Braker
President, Retail Group President, Agriculture Group
Joseph C. Christen Dale W. Fallat
Vice President, Human Resource Vice President, Corporate Services
Development
Philip C. Fox Charles E. Gallagher
Vice President, Corporate Planning Vice President, Personnel
Richard R. George Beverly J. McBride
Vice President & Controller Vice President, General Counsel &
Secretary
Gary L. Smith
Vice President, Finance & Treasurer
Investor Information
Corporate Offices
The Andersons, Inc.
480 West Dussel Drive
Maumee, Ohio (419)893-5050
Internet: www.andersonsinc.com
Transfer Agent & Registrar
Harris Trust & Savings Bank
Shareholders Services Division
311 West Monroe
P.O. Box A-3504
Chicago, Illinois 60690-3504
(312)360-5260
Form 10K
The Andersons' 1997 Form 10-K, filed in
late March 1998 with the Securities & Exchange
Commission, is available to stockholders and
interested individuals without charge by writing
or calling Investor Relations.
Annual Meeting
The annual shareholders' meeting of The Andersons,
Inc. will be held at The Andersons' Activities Building,
1833 S. Holland-Sylvania Rd, Toledo, Ohio at 7:00 p.m.
on May 14, 1998.
Investor Relations
Gary Smith, Vice President, Finance & Treasurer
(419)891-6417
With Thanks
Donald M. Mennel
Director Emeritus
The Andersons, Inc., expresses deepest gratitude to Donald M. Mennel for his
service on the Board of Directors. A member since December, 1990, Don has
chosen not to stand for re-election when directors' terms expire in May.
Fortunately, he has agreed to continue his involvement as Director Emeritus.
Don's knowledge of the grain industry and grain futures market have been
invaluable, both to the company and to the board. In particular, Don has
played an important role in developing contract alternatives for our grain
customers and in evaluating growth opportunities in our market areas. He
also has served as chairman of the board's audit committee.
Many words come to mind when thinking of Don: humble, humorous, vigorous,
enthusiastic, honest, generous. To those of us who have had the honor of
working with him, one word stands out: friend.
Fifty Years of Growth
In October, 1947, a 500,000-bushel elevator opened for business in Maumee,
Ohio. It was called The Anderson Truck Terminal, and it was an instant hit
with the farmers in the area. Its unique design eliminated the long waits they
were used to at elevators during harvest. And an innovative transportation
agreement negotiated with the Wabash Railroad allowed the new business to pay
farmers a premium over the going price for their crops.
Founder Harold Anderson wasn't afraid to do things differently. His good ideas
and strong convictions fueled the company's growth and diversification and
continue to impact the way we do business today.
The Andersons celebrated its 50th anniversary last year. Although our focus is
on the future, we took a look back in 1997 and marveled at how far we have
come.
From our origins in grain handling, The Andersons moved into mass
merchandising, agricultural and lawn fertilizer production and marketing,
railcar repair and leasing for customers throughout the country, steel
fabrication, and corncob milling. We reached out from Maumee to establish
locations in other parts of the Eastern Corn Belt and earn customers all over
the world. Two years ago, public trading of company shares began on the Nasdaq
National Market.
Each step has been built on the previous one. The expertise we develop in one
area has been used to move smoothly, logically, and successfully into new
ventures.
This will continue to be our approach to growth. We plan to celebrate many
more anniversaries, and to give our shareholders good reason to celebrate with
us.
Mission Statement
We firmly believe that our company is a powerful vehicle through which we
channel our time, talent and energy in pursuit of the fundamental goal of
serving God by serving others.
Through our collective action we greatly magnify the impact of our individual
efforts to:
Provide extraordinary service
to our customers
Help each other improve
Support our communities
Increase the value of our Company
Exhibit 22
SUBSIDIARIES OF THE ANDERSONS
Subsidiary State of Organization
The Andersons White Pigeon Terminal (a limited Ohio
partnership of which The Andersons, Inc. is the sole
general partner)
The Andersons Investment Services Corp. Ohio
(a corporation owned 100% by The Andersons, Inc.)
The Andersons Agriservices, Inc. Illinois
(a corporation owned 100% by The Andersons, Inc.)
The Andersons Export Sales Corp. Barbados
(a corporation owned 100% by The Andersons, Inc.)
Exhibit 23.1
Consent of Independent Auditors
We consent to the incorporation by reference in the Registration Statements
(Form S-8 No. 333-01249) pertaining to The Andersons, Inc. Long-Term
Performance Compensation Plan, (Form S-8 No. 333-00233) pertaining to The
Andersons, Inc. Employee Share Purchase Plan and (Form S-2 No. 333-35269)
pertaining to the registration of debenture bonds, of The Andersons, Inc. of
our report dated January 26, 1998, with respect to the consolidated financial
statements and schedule of The Andersons, Inc. and Subsidiaries incorporated
by reference in the Annual Report (Form 10-K) for the year ended December 31,
1997.
/s/Ernst & Young LLP
Toledo, Ohio
March 27, 1998
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